AUD SPEC: AUDIT OF AGRICULTURAL PRODUCERS

Direct costs

Costs like seeds, feed, and fertilizer; can be directly assigned to specific products

Indirect costs

Often related to equipment or shared services; accumulated by department or function and allocated to products through cost centers or support centers

Production overhead

Common to multple products, gathered periodically and allocated to products

Cost of goods sold, inventory, and growing crops

Where under or overapplied overhead costs are adjusted

Product development costs

Costs incurred when one product supports another

Revenue matching

The accounting system should match costs and expenses to revenues, deferring costs with future benefits as assets, while expensing others immediately

Partial replanting

Occurs due to damage from insects, crop disease, and drought.

Part of the growing or harvested crop’s costs

For partial replanting, if costs are considered normal and when combined with other capitalized costs do not exceed estimated net realizable value, they should be included as

expense;new crop

For complete replanting, the costs incurred with respect to the crop removed should be charged to _____, and the cost of the new planting should be capitalized as the cost of _______

Double-cropping

A parcel of land is use for more than one crop in the same growing season

Deferral of pre-planning costs, accrual of post-harvest costs, long-maturing crops, internally constructed assets

Extended-Period Crops and Methods

Deferral of pre-planning costs

Costs such as soil preparation, incurred before planning, should be deferred and allocated to the growing crop.A

Accrual of post-harvest costs

Certain cultural practices, like clearing residue after harvest, may extend beyond the current crop year. These costs should be estimated, accrued, and allocated to the harvested crop, even if they occur in the following year

Long-maturing crops

For crops that take more than one year to mature, related costs should be deferred until the crop is harvested

Internally constructed assets

When farmers or ranchers construct assets using their own labor and materials rather than hiring outside contractors, all applicable costs— including materials, labor, machinery, equipment, and related overhead— should be capitalized

Direct construction costs and allocated overhead.

Capitalized costs of internally constructed assets include

TRUE

The overhead rate used for capitalization of internally constructed asset should not exceed the rate for product costing

TRUE

The total capitalizec costs for internally constructed assets should not exceed the estimated external purchase price of similar assets.

Normal costs

These are costs that can be expected under typical operating conditions, reflecting the usual expenses incurred in the production of agricultural goods

Abnormal costs

These costs arise from unusual circumstances or events, such as adverse weather conditions, disease outbreaks, or pest infestations, which lead to excessive expenditures beyond the expected or standard costs.

Performance metrics, comparative analysis, expert opinions, normal loss rates

Strategies to identify abnormal costs

Performance metrics

Utilized statistics such as utilization rates, per-acre crop yields, and insecticide application rates to gauge operational efficiency. Analyzing these metrics helps in identifying deviations from normal operating conditions

Comparative analysis

Compare the producer’s performance against regional averages or similar agricultural operations. This benchmarking can highlight discrepancies that suggest the presence of abnormal costs.

Expert opinions

Engage specialists or agricultural economists to provide insights into acceptable performance levels and normal loss rates for specific crops or livestock. Their expertise can help define what constitutes abnormal costs in various context.

Normal loss rates

Understanding the typical loss rates for animals, trees, or vines is essential. Normal losses do not require separate acounting; however, any abnormal losses that occur in a given period should be accounted for appropriately. The undepreciated costs associated with lost assets due to abnormal losses should be charged to current operations to accurately reflect financial performance.

Charge to current operations

Accounting treatment for abnormal losses

Fiscal year-end relation to harvest cycle, share-crop arrangements, special conditions impacting production, government regulations, specialists services, specialized information availability

Unique considerations in engagement planning for agricultural producers

Fiscal year-end relation to harvest cycle

The auditor must consider how the producer’s fiscal year aligns with the harvest cycle of major crops.

Share-crop arrangments

Auditors should examine the terms of share-crop agreements, including title to crops, potential inventory distortions due to planting schedules, the impact of differing fiscal years, and the landowner’s involvement in management decisions regarding planting and selling.

Special conditions impacting production

Factors such as diseases and adverse weather can significantly affect crops, plants, and animals.

Government regulations

Changes in farm programs or local restrictions on agricultural chemicals can negatively impact producers

Specialist services

In some cases, auditors may lack the expertise to assess the quality of crops, plants, or animals. When needed, they should enagage specialists to evaluate plant health, estimate crop quality, detect issues like disease or infestations

Specialized information availability

Auditors can access relevant data on subsidy programs, historical crop yields, and local conditions through the Department of Agriculture’s Agricultural Stabilization and Conservation Service (ASCS), university extension services, and other resources.

Understanding of the control environment

The auditor should gain insight into the agricultural producer’s overall control environment and how transactions flow through the accounting system

Preliminary Review

Following the initial understanding, if the auditor intends to rely on the internal accounting control, they must conduct a comprehensive review of these controls

Compliance Testing

The auditor performs compliance tests to assess whether the internal control procedures are properly designed and implemented

Lower of cost or market

Growing crops and developing animals should be valued at

Lower of cost or market or sales price less estimated costs of disposal

Harvested crops and livestock held for sale should be valued at

1) The product has a reliable, readily determinable, and realizable market price
2) The costs of disposal are relatively insignificant and predictable
3) The product is available for immediate delivery

Sales prices less estimated costs of disposal can be used to value harvested crops and livestock held for sale if the following conditions are met:

Calculate potential selling prices and subtract estimated cost of disposal

Determining NRV of harvested crops and livestock

Cales price less cost to complete

Determining NRV of growing crops and developing animals