Farming

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Farming Operations Audit Case Example: ABC Manufacturing Company

Context

If ABC Manufacturing Company engages in farming operations, such as crop production, livestock breeding, or dairy farming, it’s crucial to accurately account for the biological transformation of assets, the cost and revenue associated with agricultural activities, and any subsidies or grants received.

Audit Objective

To obtain reasonable assurance that the farming operations of ABC Manufacturing Company are accurately reflected in terms of the biological assets’ existence and valuation, completeness of agricultural produce and revenue, and appropriate presentation and disclosure in accordance with the applicable financial reporting framework, such as IAS 41 Agriculture.

Types of Audit Evidence and Documentation for Farming Operations Assertions

1. Existence

• Case: Verify the physical existence and condition of biological assets involved in farming operations.

• Documentation: Document the procedures for physical verification of biological assets, including inspection of crops, livestock, and any other relevant assets, noting their condition and stages of biological transformation.

2. Rights and Obligations

• Case: Confirm the company’s rights to the biological assets and obligations related to farming operations, including lease agreements for land use.

• Documentation: Summarize the review of ownership documents, leases, and contracts that substantiate the company’s rights to biological assets and obligations for their maintenance and care.

3. Completeness

• Case: Ensure that all biological assets and agricultural produce are included in the financial statements.

• Documentation: Outline procedures for testing the completeness of records related to biological assets and agricultural produce, such as reconciling inventory records with physical counts and production logs.

4. Valuation and Allocation

• Case: Assess the valuation of biological assets and agricultural produce, including the fair value measurement of biological assets and the cost allocation for harvested produce.

• Documentation: Document the valuation techniques and assumptions used for measuring biological assets and agricultural produce, including market prices, costs incurred, and any adjustments for biological transformation and quality.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that farming operations, biological assets, and agricultural produce are correctly classified, described, and disclosed, including the accounting policies adopted and the fair value hierarchy used.

• Documentation: Evaluate the presentation and disclosure related to farming operations, verifying compliance with financial reporting standards and the clarity of information on the nature of the operations, biological assets, and government grants or subsidies.

Additional Considerations

• Government Grants and Subsidies: Assess and document the recognition and presentation of government grants or subsidies related to farming operations, ensuring compliance with applicable standards like IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.

• Revenue Recognition: Evaluate the company’s revenue recognition practices for agricultural produce, documenting the basis for recognizing revenue at fair value less costs to sell upon harvest.

• Internal Controls Evaluation: Evaluate the design and effectiveness of internal controls over the management and accounting of farming operations and biological assets.

• Inquiries of Management: Conduct inquiries with management regarding the management of farming operations, the selection of valuation models and assumptions, and any significant changes in farming activities.

• Communication with Those Charged with Governance: Discuss significant findings or concerns identified during the audit of farming operations with management and those charged with governance, especially regarding the valuation of biological assets, revenue recognition practices, and adequacy of disclosures.

Conclusion

The audit of farming operations is essential for ensuring that biological assets and agricultural produce are accurately accounted for and disclosed in the financial statements. Documenting the audit procedures and findings related to each relevant assertion provides a basis for the auditor’s opinion on the financial statements, enhancing the credibility and transparency of financial reporting related to agricultural activities.