Agricultural products are usually accounted for under the accrual accounting method, where revenues are recognized when earned and expenses are recognized when incurred, regardless of when the cash is received or disbursed.
For example, when crops are grown, the costs incurred are recorded as expenses, and when the crops are sold, the revenue is recognized.
The following are the key accounting treatments of agricultural produces:
- Cost of Sales: The cost of sales includes all direct and indirect costs incurred in growing and harvesting crops, including seed, fertilizer, labor, and overhead costs. These costs are allocated to each crop based on the expected yield of the crop.
- Inventory: Agricultural products are considered inventory until they are sold. The cost of inventory is recorded as a current asset in the balance sheet and the cost of sales is recognized in the income statement.
- Revenue Recognition: Revenue from the sale of agricultural produces is recognized when the crops are delivered and the title passes to the buyer.
- Impairment: Impairment loss is recognized when the carrying amount of inventory exceeds the estimated net realizable value.
Audit Risks:
- Misstatement of inventory: The risk of overstating inventory levels is high in the agricultural industry, as it is difficult to estimate the quantity and quality of crops until they are harvested.
- Misclassification of expenses: Agricultural expenses may be misclassified as capital expenditures, which would result in a lower cost of sales and higher net income.
- Improper revenue recognition: There is a risk of premature recognition of revenue if the crops are sold before they are harvested.
- Inadequate disclosure: There is a risk of inadequate disclosure of key information about the costs and risks associated with growing and harvesting crops.
- Underestimation of impairment loss: The risk of not recognizing an impairment loss on inventory is high if the estimated net realizable value is lower than the carrying amount.
- Fraud: There is a risk of fraud in the agricultural industry, particularly with regard to the misreporting of inventory levels and the manipulation of expenses.
- Complex accounting estimates: The valuation of inventory, including the calculation of the cost of sales, requires complex accounting estimates and assumptions, which may be subject to errors.
- Inadequate internal controls: There is a risk of inadequate internal controls over the accounting and reporting of agricultural products, which may result in material misstatements.
- Lack of expertise: Auditors may not have the necessary expertise to accurately assess the risks and procedures for auditing the accounting for agricultural products.
- Economic conditions: The agricultural industry is highly susceptible to changes in economic conditions, including weather patterns and market conditions, which may impact the value of crops and the overall financial performance of the business.
Audit Assertions:
- Existence: The agricultural crops, livestock, and other related products exist and are properly recorded in the financial statements.
- Valuation: The agricultural crops, livestock, and other related products are accurately valued in the financial statements.
- Completeness: All transactions related to agriculture and agricultural production are recorded in the financial statements.
- Accuracy: The transactions related to agriculture and agricultural production are recorded accurately in the financial statements.
- Classification: The transactions related to agriculture and agricultural production are properly classified as revenue or expenses in the financial statements.
- Occurrence: The transactions related to agriculture and agricultural production have occurred and are properly recorded in the financial statements.
- Rights and obligations: The rights and obligations related to agriculture and agricultural production are properly recorded in the financial statements.
- Presentation and disclosure: The financial statements present and disclose the transactions related to agriculture and agricultural production in accordance with the applicable accounting standards.
- Relevance: The transactions related to agriculture and agricultural production are relevant to the financial statements.
- Reliability: The transactions related to agriculture and agricultural production are reliable and represent the underlying economic events accurately.
Audit Procedure for Audit Agriculture and Agricultural Produces
Audit procedures for the audit of agriculture and agricultural produce are a set of systematic and objective steps performed by the auditor to obtain evidence that supports the audit assertions made about the financial information.
The objective of these procedures is to gather evidence that provides a reasonable basis for the auditor’s opinion on the financial statements. The audit procedures for agriculture and agricultural produces are as follows:
- Understanding the Entity and Its Environment: The auditor must understand the entity’s operations, industry, and the environment in which it operates, including the regulatory environment, to identify the risks of material misstatement.
- Risk Assessment: The auditor must assess the risk of material misstatement in the financial statements. This includes an assessment of the entity’s internal control system and an understanding of the financial reporting process.
- Assessment of Agriculture and Agricultural Produces: The auditor should understand the agriculture and agricultural products in which the entity is engaged, including the types of crops, livestock, and other agricultural products produced, as well as the methods of production and storage.
- Evaluation of Accounting Policies: The auditor should evaluate the entity’s accounting policies related to agriculture and agricultural produces and assess their consistency with the relevant accounting standards.
- Test of Controls: The auditor should perform tests of the entity’s internal controls related to agriculture and agricultural products, including the completeness, accuracy, and reliability of the data used in the financial statements.
- Substantive Audit Procedures: The auditor should perform substantive audit procedures to obtain evidence to support the audit assertions. This may include testing of transactions, accounts, and disclosures, as well as analytical procedures and substantive tests of details for agricultural and agricultural products.
- Evaluation of Accounting Estimates: The auditor should evaluate the entity’s accounting estimates related to agriculture and agricultural produces, including estimates of crop yields, production costs, and fair value.
- Review of Disclosures: The auditor should review the disclosures related to agriculture and agricultural products in the financial statements to ensure that they are complete and accurate.
- Final Review: The auditor should review the audit findings, conclusions, and recommendations related to agriculture and agricultural products to ensure that they are consistent with the audit evidence obtained and that all material issues have been addressed.
- Documentation: The auditor should properly document all audit procedures performed, including the evidence obtained and conclusions reached, to support the auditor’s opinion on the financial statements.
These audit procedures should be performed in accordance with the International Standards on Auditing (ISA) and adapted as necessary to meet the specific circumstances of the entity being audited.