The Impact of Just-In-Time on the Audit of Purchasing

Abstract

The Impact of Just-In-Time on the Audit of Purchasing A switch to any new manufacturing technology could require significant changes in a firm's accounting system. Unresolved is the question of what effect these changes will have on the independent audit of the manufacturing firm's financial statements. The purpose of this study is to investigate the impact of just-in-time (JIT) on the audit of purchasing, from the point of view of the certified public accountant performing the audit. Specifically, the aim is to analyze possible changes in audit testing and internal control in the purchasing function resulting from the implementation of JIT concepts. A switch to any new manufacturing approach could require significant changes in a firm's accounting system. From a study of the just-in-time (JIT) literature, it appears that the internal control environment and the cost accounting system will undergo major modifications when JIT techniques are adopted by a manufacturer. Unresolved is the question of what effect these changes will have on the independent audit of the manufacturing firm's financial statements. The purpose of this study is to investigate the impact of JIT on the audit of the purchasing area, from the point of view of the certified public accountant (CPA) performing the audit. Specifically, the aim is to analyze possible changes in audit testing and internal control resulting from the implementation of JIT concepts in the purchasing area. Modifications of purchasing practices caused by the adoption of JIT techniques may affect internal controls designed to protect company assets, ensure proper authorization procedures, and provide sufficient documentation. It is important that purchasing professionals be aware of potential control problems in the implementation stages of JIT, so that proper controls are maintained when procedures are changed. Effective internal controls are necessary not only to safeguard company resources but also to facilitate the performance of a cost-effective audit by the firm's outside auditors. Since the adoption of JIT purchasing techniques may change the traditional accounting system, an investigation of possible consequences should be beneficial. Following a review of common characteristics and goals of a JIT purchasing system, the results of a survey of national public accounting firms is reported. JIT PURCHASING The fundamental concept of JIT is the elimination of waste caused by overproduction, unnecessary handling, inefficient processing, and defective production.[1] Processes that do not add value to the product should be eliminated. In a manufacturing operation, excessive inventory is usually the most visible component of waste. Although inventory reduction is a primary goal, before inventory can be reduced, the problems it conceals must be resolved. Inventory may protect against machine breakdowns or lengthy setup times; in many cases, an oversupply of inventory is used as a buffer against poor quality material. Many factors contribute to successful JIT implementation, but the key is quality at the source, throughout the system. Quality is a major consideration in applying JIT techniques to purchasing, as it is in production. Improved product quality is one of the most important benefits gained by companies using JIT purchasing. Other advantages include improved productivity, a reduced need for incoming inspections, better production scheduling, and a reduction in purchasing paperwork.[2] JIT purchasing promotes the development of long-term relationships with a few dependable suppliers. Frequent delivery of small lot sizes is a typical goal of JIT purchasing. A cooperative relationship between buyer and supplier is necessary for the smooth functioning of a tightly scheduled system. Under JIT, single sourcing in a long-term relationship is viewed as a way to develop supplier loyalty and promote supplier contribution to product quality and design. …