Auditing Agricultural Producers

• Agricultural producers include farmers and ranchers who grow or raise agricultural or horticultural products for sale or use in the production of other agricultural or horticultural products.

Audit Design and Conduct

• Audits of agricultural producers should align with audits of other enterprises.
• Auditors should consider the organization's size, nature, and internal accounting controls.
• Auditing procedures offer guidance on industry-specific matters.
• These procedures don't replace or limit auditor judgment when determining audit scope.
• Audit procedure scope includes nature, timing, and extent.

Background Information

• Farming and ranching activities range from small proprietorships to large public companies.
• Activities include growing grains like wheat, milo, and corn.
• Activities include growing crops like soybeans, vegetables, sugar beets, and sugarcane.
• Activities include growing fruits and nuts, operating nurseries.
• Activities include breeding livestock (cattle, hogs, sheep), operating dairies.
• Activities include raising fish, shellfish, poultry and breeding horses and small animals.

Agricultural producers: Practices and Products

• Agricultural producers' practices and products vary due to temperature, soil, rainfall, and economics.
• Marketing primarily involves direct sales to commercial enterprises or consumption in related activities.
• Agricultural product prices are often determined by economic forces, but some are set by state agencies.
• Forward sales contracts or commodity futures contracts are used to reduce risks.
• Producers operate their farms/ranches, or act as tenants under cash/crop-sharing agreements.
• Crop-sharing agreements provide a portion of the crop to the landowner.
• Landowner participation in costs, profits, and management depends on the agreement terms.

Agricultural producers: Daily Activities

• Daily activities may create additions to fixed assets.
• Examples include adding raised animals to breeding herds or constructing buildings.
• Building fences or other land improvements constitutes additions to fixed assets.
• Fixed asset additions can be the result of using producer equipment and producer employees

Accounting Systems

• There is increased attention to accounting systems in agriculture due to increased complexity.
• There is also an increased number of educated agricultural producers and managers
• Large private entities and public corporations use sophisticated accounting systems.
• Many producers use basic records for both tax and financial accounting.

Internal Accounting Controls

• Internal accounting controls are often weak in small agricultural operations.
• This is due to small accounting staffs and little segregation of duties.
• Owner/manager involvement provides control over access to assets and transaction authorization.
• Large agricultural operators have adequate accounting controls.
• Accounting controls are applied to sales, production costs, inventories, purchases, and equipment usage.

Engagement planning: Key Considerations

• Consider the relationship between the producer's fiscal year-end and the harvest cycle of major crops
  • A producer with June 30 year-end and a rice crop will have a growing crop to consider at year-end
  • However, a similar producer with a December 31 year-end won't have the same concern
• Existence of share-crop arrangements
  • The auditor should consider share-crop agreement terms.
  • Factors include title to crops, inventory possibilities, divergent planting schedules and landowner rights
• Special conditions affect the producer's crops, plants, and animals.
  • Special conditions include diseases and weather that could adversely affect results and inventory values
• Government regulations can impact producers
  • Changes in farm programs or localized restrictions on herbicides/pesticides/fungicides
• Specialist service should be sought when needed.
  • Auditors may need help to evaluate plant and animal health, estimate yields, and notice infestations
• Availability of specialized information impacts planning.
  • Subsidy programs, crop yields, and local conditions, are available from the Department of Agriculture

Role of the Auditor

• The internal accounting controls for agricultural producers are similar to those in manufacturing.
• Controls exist over transaction cycles (purchasing, sales, payroll).
• Controls exist over production activities.
• These controls provide assurance that costs are allocated correctly.
• Costs are allocated to inventories and self-constructed assets.

Audit Objectives for Inventories

• Obtain reasonable assurance that inventory quantities represent all agriculture related products
• Audit objectives include reasonable assurance that inventory quantities represent all animals belonging to the producer
• Determine an acceptable valuation method and ensure it is properly and consistently applied for audit purposes

Inventory Auditing Procedures

• Inventory audit procedures generally align with those used when auditing manufacturing entities
• Unique audit risks require modification of the typical procedures
• For raised products lacking title documentation, review cost records, yield statistics, and supporting documents for evidence
• For raised livestock lacking ownership evidence, test reasonableness by applying productivity rates.
• Inspect real estate ownership records for support for crops and livestock ownership.
• Review tenant lease agreements to identify what impact they might have on inventories
• Agricultural products are often stored in public warehouses.
• The appropriate procedures should be followed to obtain reasonable assurance for entities storing good off-site
  • Reasonably assure that the inventories exist, are owned by the entity, and are in a marketable state/condition
• Determine whether they are pledged as collateral for loans.

Field and row crops

• Field and row crops with cycles of less than one year are annuals.
• Examples include wheat, barley, milo, corn, soybeans, sugar beets, tobacco, cotton, crops raised for seed, tomatoes, lettuce, beans, cabbages and melons
• Field and row crops are planted from seeds or are transplanted from beds
• Field and row crops typically develop to harvest within several months.
• In some areas, two or three different crops can be grown in the same field during one year (double- or triple-cropping).
• Protect from spoilage.
• Quick handling from harvest to storage is required to avoid spoilage

Field and row crops: Hybridization

• Hybridization created plant varieties with improved growth, maturation, and yield.
• Improved plant varieties happened along with improvements in cultural techniques and harvesting equipment.
• Innovations resulted in increased yields per acre, reduced costs, and enhanced economic value.

Accounting Principles for Crops

• Costs of growing crops should be accumulated until harvest.
• Accumulation is subject to fair value less cost to sell adjustments.
• Harvested crops stored for sale are reported at fair value less cost to sell.
• Reporting at fair value is in accordance accounting and industry practices.
• Reporting at fair value is dependent on certain conditions.
• Establish cost centers by field, crop, ranch, or area.
• Charge cost centers with direct material, labor, and allocated indirect costs.
• Maintain records to allocate total costs to separate crops for multiple crops.

Field and row crop production costs

• Most productions costs benefit current-year crops (e.g., furrows and beds for annual plantings).
• Allocate costs for resources benefiting multiple crop years to the appropriate years.
• Rice production's engineering and grading costs for borders (ridges to retain water) may benefit several years.
• Properly include the costs in property and equipment.
• Amortize costs over their useful lives.
• Farming procedures after harvest typically benefit the next year's crop.
• Additional harvest-related costs (tillage, chopping, or burning) needed to correct a physical/noxious condition should be included.
• In certain cases, the costs should be identified and accrued as the costs of the harvested crop.
• If a field or row crop is raised for use (grain or hay for livestock), production costs should be identified and accounted for like other maintenance costs.

Auditing Considerations

• Inquire about farming procedures and become familiar with the operation and unusual events.
• Consider performing the following audit procedures for harvested and growing field and row crops:
  • Physically observe and review crop maturity and quality
  • Confirm the existence of harvested crops stored in outside warehouses
  • Reviewing and testing the capitalized costs of growing and harvested crops for reasonableness
  • Determine that capitalized costs of crops do not exceed market
• Lacking appropriate ownership records can lead to special audit risks when determining the ownership of harvested crops.
• Evidence of crop ownership could be the review of direct crop costs, harvesting, handling expenses, leases and tenant agreements
• Audit risks when reviewing the quality of harvested crops should be considered, quality can impact value
• Auditor should seek reasonable assurance that storage commodity has a variety and quality that is acceptable
• The value is influence by condition, variety, and unique market considerations

Physical state of the product

• The physical state of product may be affected in condition such as -Mold, Decay, Spoilage. In that situation only the experienced and qualified can know the condition to what level it is affected too.
• Seed held for longer period can loss germination detection via laboratory test may be require.
• Damage affect by microscopic examination may be undergo for the type and extent of its deterioration.

Variety of a storage commodity

• Variety of it influence material has its value such: Technique of development like Varieties and strains result superior
• The stored seed have lower value now compare with the one replace it like Plant Trees become obsolete before marketing is ready

Consideration

• Assess Value of farming products using experience Specialist

Orchards and Vineyards

• Orchards and groves produce commodities like citrus, walnuts, almonds, pecans, peaches, pears, apples, apricots, cherries, and avocados
• There are also many varieties and subvarieties of each of the commidities
• "vines" refers to grape vines, which have several hundred varieties.

Orchards and Vineyards Development

• Trees and vines require a development period to reach maturity and commercial quantities.
• Substantial expenditures for labor and material are made to shape and train the tree or vine.
• Fruit/nut tree limbs are held apart to spread the tree, improve productivity, and develop a wider crown
• Trees are pruned and shaped to encourage lower profiles in the tree's earlier growth stages
• These practices limit tree height and alter shape for mechanical or rapid vehicle picking

Tree and Vine Care

• During the development period, trees and vines require grafting, pruning, spraying, cultivation, and similar care
• Row crops are grown between developing trees/vines to provide a revenue source
• Fruits, nuts, and grapes can be grown in most parts of the nation.
• Crop development periods and cultural cycles vary in different geographic areas.
• Costs of labor and materials to shape and train the trees and vines are huge
• Trees and vines have varying productive lives depending on several attributes
  • Plant, Soil, Climate, and other

Orchards and Vineyards Products

• Products require careful handling after harvest.
• Products must be skillfully graded due to the wide variations in quality.
• Due to the perishable nature of the goods from Orchards and Vineyards Products can be downgraded or worthless.
• Orchard and vineyards products must be protected from temperature variations and from insects for proper storage

Orchards and Vineyards Accounting

• Trees and vines can be planted by a producer or contract basis.
• Young plants are purchased as nursery stock and transplanted.
• Cultural costs during development (stakes/wires, grafting, pruning) should be capitalized.
• Net proceeds from sales before commercial production should be applied to the capitalized cost of the plants
• Estimate the productive lives of trees/vines considering geography (water, humidity, temperature)
• Consider variety, rootstock, pruning, and harvesting methods
• Grower and commodity associations and extension services can be the best sources
• Normal losses of plants don't generally require adjustment to capitalized cost.
• The capitalized cost of trees/vines lost to abnormal events should be written off.
• Costs to replant should be capitalized.
• Each orchard, vineyard, or grove may be a cost center.
• Costs before commercial production should be accumulated in property accounts.
• When production begins, accumulated costs should be depreciated over the estimated useful life.
• Orchards/vineyard operators account for growing/harvested crop costs like other agricultural producers.
• Growing costs include maintenance (cultivation, spraying, fertilizing, pruning) and overhead cost allocation.
• The harvest crop is reported at lower of cost or net realizable value at the market

Orchards and Vineyards Audit

• The auditor will need to review the relative health and conditions of the trees or vines.
• The auditor will need to review the estimated remaining productive lives of the trees or vines
• An annual inspection of the orchard or vineyard, and, when questions arise, the auditor may need to consult a specialist
• Auditor in this field need to test the capitalized costs of orchards and vineyards to determine whether they are recoverable.
• In testing for recoverability, compare against prevailing costs.
• Compare againts state agricultural, universities, agricultural extension, and trade organizations

Auditor's Considerations

• In testing recoverability of costs of growing crops, consider prospective yield, weather and market price
• Auditor need test how economically harvest and transport the crop to the marketplace
• It is important to note that is not uncommon for net realizable value of the crop can be less then the accumulated cost
• The audit procedures that the auditor may perform
  • Test accuracy of accumulation for growing costs
  • Compare the accumulation cost against market prices and estimated disposition cost
  • Consider the Physical condition of inventory in review, special may also be advisable.

Intermediate-Life plants

• Intermediate-life plants are perennial plants with growth cycles over one year.
• Examples include artichokes, asparagus, bush berries, kiwifruit, alfalfa, and grazing grasses
• Plants produce for more than one year, but not as long as trees and vines
• Accounting principles are like those for orchards and vineyards.
• Plants may be developed by the producer or others on a contract basis.
• Producer's costs include land preparation, planting beds, stakes/wires, cultural care, and overhead.
• Capitalized costs occur for plants and vines (acquired via contract or self-developed).
• When commercial production begins, the capitalized costs should be depreciated over their productive lives, regional differences, climate and soil conditions, and cultural practices are some of the attributes and characteristics to consider when establishing Depreciable lives of the assets.
• The capitalized costs will be classified with PPE (property, plant, and equipment)
• Financial reporting of costs and estimated useful lives should be note and disclosed
• Maintenance costs, harvesting, depreciations allocated is considered After the development period, Reporting will be consider the lower side (net realizable value and market Value

Intermediate-Life plants Considerations

• The auditor will consider testing of Accumulated cost and Amounts already capitalized, The best practise is to physically observe the condition of the plants in the fields,

Intermediate-Life plants Considerations

• Test the accuracy of accumulated cost in plant development to ensure what have been capitalization is legit
• What is prevalent has to be compare for accurate measurement purpose.
• If there is a uncertainty for the future it may a good thing to seek specialist opinion, test may also be performed to ensure it the usefulness of life of plant,

The Breeding and Production of Animals

• In the Breeding category you will consider maturity, in respect or male , female that can registered that can maintain in Commercial or regular grade
• Registered to make desirable the character improvement of the animals same with commercial
• Retention on the value demand base and ability to animal same desirable.
• High the animal value due to there nature to compare with Commercial

Production and services of Animal

• Provides services or product other there descendent
• Provide example of cows of milk ( Dairy) , Poulty- eggs/Meat
• Sheep-wool and Meat
• Horse still raise that is for cattle or sheep raiment
• Training horse with program
• Dairy Herds use primarily to sold or retained or processed the Animals are replacement Animals

Production and Masting

• Milk market often control in various states,
• The Rights call that Producer have for marketing- milk quota- can constract seller allow or amount some per period in agreement.
• Separate to production Herd
• Value increase and sell and separate

Poultry Operation

• Three phase poultry operations: brooder, meat, and eggs
• All three might be in one (integrated) operation
• May be limited -for example Meat or Broiler operation
• Hatchlings be purchased from other operations of various products
• Brooder chicken- income source of principal
• nominal and incidental sale when laying are spent
• operation 24 hr attention all the times so need employees who provide also housing often

Breedings - ACCOUNTING POLICIES

• The registered or Commercial purpose is so they reproduce so some cost of breeding annual must be accumulate
• medicine , and etc is include Prior Maturity or disposal additional cost are capitalize like raising rational the expense and and rate it on what is available.

ACCOUNTING POLICIES -Animals

• Not all surVive young not expense , abnormal are always written off
• Accounting principle standerd and system for culling or replacement. Semen if you maintain usually a Cost direct , process for that

Accounting

• Animals vary by what you use animal for there usual alternatives include follows:
• If transport to cost you accumulate cost what depreciate them for herds.
• Sale cost - young sale breeder fees so you accumulate sales.
• If you sale until it fatten sales then the cost goes until you fatten
• Feed cost is consider then what happen should it be capitalize in product animal

Accounting Fixed

• Breeds animals if fixed are depreciate asset. Until it ready service to be consider but general principle then what do you
• Animals such inventory has a short period of productive in short,poultry

Auditing Considerations

• One of the Major process is to see the Animals objective to perform
• See if record are accurate for accquisition Ensure salvage, depreciate rate and is normal

Additional Consideration for Audit

• Look in the Animal Grazing
• Specialize Brand tattoo tag specialist in the field must be there

Accounting fixed with general acceptes accounting principle

• Animals depreciation of breed you find then group you do

Milk-Marketing Rights

• Market allocation is necessary there for you should do depreciate by life time
• Poultry in the operation will look same unless it different
• The initial costs will consider
• labor material consider
• the price will be amortize also salvage