Specialized Industries (Agriculture) PDF

INTRODUCTION [Quinones] An industry is considered specialized if it is governed by a specific reporting standard or has a distinct accounting policy that has been developed to account for specialized transactions and balances that are based on the normally applied financial reporting standa...

INTRODUCTION [Quinones] An industry is considered specialized if it is governed by a specific reporting standard or has a distinct accounting policy that has been developed to account for specialized transactions and balances that are based on the normally applied financial reporting standards. EXAMPLES of specialized industries are as follows: ​ Mining ​ Banking and Insurance ​ Airline ​ Agriculture [A] RISKS AND CONTROLS IN LIFE SCIENCES AND AGRICULTURAL ENTITIES [Nora] Agricultural producers face various challenges due to factors like temperature, soil, rainfall, and regional economics. They market their products directly to commercial enterprises, consume them in related activities, or market them through agricultural cooperatives. These cooperatives can act as agents or commingle patrons' products, either marketing them in the form they were received or processing them before sale. Producers also sell some products through governmental programs. Farmers must constantly manage and deal with various agricultural dangers, which can lead to negative outcomes such as decreased yields and incomes, financial bankruptcy, food insecurity, and human health issues. These risks can have a cascade effect, where one form of risk leads to another, such as heavy rains during harvest creating new hazards, such as the financial risk of being unable to pay back loans. Guide for Audits of Agricultural Produces and Agricultural Cooperatives [Quinones] ​ In 1987, the American Institute of Certified Public Accountants (AICPA) published a list of volumes of the Auditing and Accounting Guide series. The list includes an audit and accounting guide presenting the recommendations of the AICPA Agribusiness Special Committee regarding the application of generally accepted auditing standards to audits of the financial statements of agricultural producers and cooperatives. The AICPA Auditing Standards Board has reviewed this guide to ensure its consistency with existing auditing standards. Agricultural Producers: [Nora] ​ Agricultural entities include farmers and ranchers who grow or raise agricultural products for sale or use in producing other agricultural products. In the agricultural industry, audits of agricultural producers should be designed and conducted in the same manner as audits of other enterprises, giving due consideration to the size and nature of the organization and the system of internal accounting control. Unique characteristics of the agricultural sector [Nora] The following are the unique characteristics of the agriculture sector: (1)​ Dependence on the weather – Weather dictates the level of production of an agricultural entity. (2)​ Variety of activities - Agricultural entities may be involved in one or more activities, and their practices and products may vary because of differences in temperature, soil, rainfall, and regional economics (3)​ Regulated or controlled product pricing - Prices of most agricultural products are determined by economic forces, but some product prices are established by government regulatory agencies. Agricultural entities may use forward sales contracts or commodity futures contracts to reduce the risks associated with fluctuating commodity prices. Accounting Systems: ​ More attention has been given to accounting systems and practices in the agricultural industry in recent years because of the increased size and complexity of operating units as well as the greater number of formally educated and trained agricultural producers and managers. While many large private entities and publicly held corporations engaging in agricultural production have sophisticated accounting systems, many producers maintain elementary accounting records. Internal Accounting Controls (Small vs Large Agricultural Entities): ​ The internal accounting controls of many small agricultural operations are weak because they typically have small or part-time accounting staff and little or no segregation of duties. However, the involvement of the owner/manager in the operations frequently provides some control, particularly over access to assets and authorization of transactions. ​ Large agricultural operators are likely to have adequate accounting controls over critical functions, such as sales, costs of production, inventories of products and supplies, purchases and disbursements, equipment use, and personnel utilization. Cost Accounting & Cost Allocations: ​ Accounting for agricultural product costs is similar to manufacturing costs, but producers face challenges in cost identification due to shared personnel, equipment, and diverse crops and animals, as well as the need for asset construction and asset management. ​ Production costs, including seed, planting, feed, and fertilizer, can be directly allocated to a product or accumulated by a department or function. Costs should be allocated when one raised product is used in another, such as grain or hay being used to feed livestock. Some crop costs, such as soil preparation, should be deferred to the growing crop, while others should be deferred until harvest. 5 general types of risk in agriculture are as follows: (1)​ Production Risk - The unpredictable natural growth processes of crops and livestock are the source of production hazards, typically attributed to weather, climate, pests, and illnesses. Production hazards also include other factors that limit or reduce yield, such as excessive levels of heavy metals in soils or salinity in the soil. (2)​ Market Risk - Weather shocks, energy price shocks, unequal access to information, and price, cost, and market access uncertainty are examples of agricultural market risks. Market risk is also influenced by protectionism, liberalization, and international trade. Farmers' decision-making processes alter when several threats arise at once, impacting agricultural commodity output and prices. (3)​ Institutional Risks - Unpredictable changes in laws and regulations brought about by formal or informal institutions are the source of institutional risks in agriculture. Farmers have little control over dangers created by governments and unofficial organizations. Farmers' general well-being is impacted by the increased assistance and connections they receive from these institutions as farm productivity becomes more market-focused. (4)​ Personal Risks - Personal risks are unique to each person and can include health problems or interpersonal interactions that have an impact on a home or farm. These hazards may include harm from farm equipment, fatalities or diseases brought on by disease, adverse health consequences from pesticide use, and disease transmission from livestock to people. For  farmers, health problems can lead to concerns and fluctuations in income. Customary regulations that result in the takeover of land or animals due to divorce or death are just one example of the interwoven personal and institutional risks that farmers frequently handle. (5)​ Financial Risks - A farm's operating cash flow is more variable because of the fixed financial obligations that come with using credit. This is known as financial risk, and it relates to the risks related to how the farm is financed. Changes in interest rates, loan availability, or credit conditions are a few examples of financial risk sources. [B] AUDIT OBJECTIVES AND PROCEDURES Accounting for Inventories: ​ Inventories of agricultural producers include growing crops, developing animals to be held for sale, harvested crops, livestock held for sale, and secondary products, such as calves from dairy herds and wool from sheep. ​ Measurement: 1.​ Growing crops and developing animals to be held for sale should be valued at a lower cost or market. 2.​ Inventories of harvested crops and livestock held for sale may be valued at the lower of cost or market or, by established industry practice, at sales price less estimated costs of disposal when all the following conditions exist: a.​ The product has a reliable, readily determinable, and realizable market price. b.​ The product has relatively insignificant and predictable costs of disposal. c.​ The product is available for immediate delivery. General Audit Objectives for Audit of Inventories: ​ Audit objectives for inventories include the following: (a)​ Obtaining reasonable assurance that inventory quantities represent all agricultural products and animals belonging to the producer and (b)​ Determining that an acceptable valuation method has been properly and consistently applied. Specific Audit Objectives for Audit of Inventories: 1.​ Compliance is a crucial objective in the audit of agricultural entities due to the unique regulatory environment they operate in. Agricultural businesses must follow various regulations related to food safety, environmental protection, labor practices, and trade. Meeting these regulatory requirements helps them avoid legal penalties and fines, ensuring uninterrupted operations. Compliance is also essential for accessing global markets, as exporting agricultural products often requires adhering to international standards. Effective compliance helps manage risks associated with contamination, pest infestations, and adverse weather conditions, thus supporting continuous operations. Therefore, auditing for compliance is essential to ensure that agricultural entities operate within the legal and regulatory framework, contributing to their long-term success and sustainability. 2.​ Risk management becomes a critical audit objective in agricultural entities due to the unique and numerous risks inherent in the agricultural industry. Agricultural entities face a wide range of risks, including weather-related risks, pest infestations, disease outbreaks, market price volatility, and regulatory compliance challenges. These risks can significantly impact the entity's financial performance and operational stability. Auditors evaluate the effectiveness of an entity's risk management processes to ensure that these risks are identified, assessed, and  mitigated. Effective risk management provides valuable insights for management to make informed decisions, enhances decision-making, and protects assets and resources. Agricultural entities often have significant investments in biological assets, equipment, and infrastructure. Auditing risk management processes helps ensure that these assets are adequately protected and that any risks to their value and usability are minimized. By making risk management a key audit objective, auditors help ensure that agricultural entities are equipped to identify, assess, and mitigate risks effectively. 3.​ Internal control is more likely to be categorized as a critical aspect towards the auditing process. The mentioned matter, further possesses a significant role in terms of ensuring the accuracy and reliability of financial reporting within a particular organization. It further consists of various policies and procedures that management implements to safeguard assets, ensure the accuracy of financial records, and comply with applicable laws and regulations. The effectiveness of internal controls can significantly impact an audit's outcome, making them an essential area of focus for auditors. 4.​ Financial accuracy is also classified as a crucial aspect of auditing. This further ensures or verifies that an organization’s financial statements are accurate and organized towards its financial statement. Auditing serves the fundamental purpose of instilling trust and credibility in financial reporting, which is essential for stakeholders, including investors, creditors, and regulatory bodies. By focusing on financial accuracy, auditors help organizations maintain compliance with applicable laws and standards while also identifying areas for improvement. 5.​ Operational Efficiency is a critical audit objective in life sciences and agricultural entities due to the resource- intensive and highly regulated nature of these industries. They typically handle intricate supply chains, substantial research and development (R&D) investments, and the handling of biological or perishable assets. Ensuring operational efficiency involves evaluating how effectively resources, including labor, materials, and technology, are utilized to achieve organizational goals while minimizing waste and costs. Identifying inefficiencies, such as redundancy in processes or resource mismanagement, is the primary objective of an operational efficiency audit. This can help businesses increase productivity and profitability. Additionally, when dealing with regulated sectors, it is crucial to maintain effective operations to meet rigorous quality and safety benchmarks without incurring unnecessary expenses. Life sciences and agricultural organizations can enhance their competitiveness by optimizing processes, promote sustainable practices, and focus on innovation and growth more efficiently. 6.​ Sustainability In both life sciences and agriculture, sustainability is a key objective of audits; these industries are heavily dependent on natural resources, ecosystems, human health. The process of sustainability audits enables the organization to achieve its environmental, social, and economic goals, ensuring long-term sustainability and compliance with regulatory requirements. This is achieved through regular review processes. For farming enterprises, this entails accounting for resource usage, such as managing water and soil, decreasing chemical inputs, and increasing biodiversity. In the life sciences, these audits may look at issues such as ethical sourcing of materials and waste management along with ways to reduce carbon emissions and associated costs. Audits focus on the sustainability of an organization and help them identify risks associated with environmental degradation, climate change, and stakeholder expectations while identifying ways to increase efficiency and promote innovation. This objective is to keep businesses strong, not weaken the trust of stakeholders and help advance global sustainability goals. Considerations for Audit Procedures: Audit procedures for inventories generally are similar to those performed in the audit of manufacturing entities. Unique audit risks may require modification of those procedures, as described here: 1.​ When no documents exist to evidence title to raised products, reviews of cost records, yield statistics, and supporting documents should indicate the nature and extent of the farming activity and thus provide that evidence. 2.​ When there is a lack of documentary evidence to support the ownership of raised livestock, the number of animals represented as produced for a period may be tested for reasonableness by applying normal productivity rates to the productive animals in the breeding herd. Inspection of records evidencing real estate ownership may provide additional support for the ownership of crops and livestock on the land. Tenant lease agreements should also be considered. 3.​ Inventories of agricultural products are often stored in public warehouses. The auditor should perform those procedures considered necessary (a) to obtain reasonable assurance that the inventories exist, are owned by the entity, and are in a marketable condition and (b) to determine whether they are pledged as collateral for loans. (See SAS No. 1, sec. 331.14, as amended by SAS No. 43.) Engagement Planning: Engagement Planning: Several unique planning considerations in the audit of an agricultural producer include: a)​ The relationship of the producer's fiscal year-end to the harvest cycle of the producer's major crops. (For example, a producer with a fiscal year ending on June 30 whose major crop is rice will have a growing crop for the auditor to consider at year-end; however, the auditor for a similar producer with a fiscal year ending on December 31 would not have that same concern.) b)​ The existence of share-crop arrangements. c)​ Special conditions affecting the producer's crops, plants, and animals, such as diseases and unfavorable weather conditions. d)​ Government regulations affect the producer. e)​ The need for the services of a specialist to evaluate the quality of the producer's crops, plants, or animals. Major Audit Procedures Performed: 1.​ Tests of control are an integral part of an auditing procedure. This further provides significant matter towards the auditors in regards with the effectiveness of a company's internal structure or also known as management. These tests are firmly conducted in order to assess whether internal controls, generally or positively designed to prevent or detect material misstatements in financial statements, are operating effectively. Unlike the substantive procedures or testing, which directly test the financial statement balances, tests of control focus on the processes and procedures implemented by management. The goal is to determine the reliance that the auditor can place on these controls in reducing the substantive testing required. 2.​ Substantive testing is one of the audit procedures in agricultural entities which have a unique nature of their operations and the significant financial transactions involved. Agricultural entities often deal with biological assets, such as crops and livestock, which require accurate valuation and recording. Substantive testing helps auditors verify the accuracy, completeness, and validity of these financial transactions and balances. Key aspects include ensuring the existence and condition of biological assets through physical inspections, examining valuation methods to verify appropriateness based on market prices and other factors, and checking that all transactions are recorded in the financial statements. Auditors also ensure the accuracy of transactions, assess whether they are recorded in the correct accounting period, and verify legal ownership of the assets. By conducting substantive testing, auditors gather reliable evidence to support their audit opinion, ensuring the financial statements present a true and fair view of the agricultural entity’s financial position and performance. Specific Audit Procedures: Some of the audit procedures performed for audit of agricultural entities are as follows 1.​ Document Review is an essential audit procedure, especially in life sciences and agricultural organizations, as these industries are highly regulated and resource-sensitive. In this regard,  the auditor reviews a wide range of documents, including production logs, research protocols, inventory records, environmental impact assessments, regulatory compliance reports, and quality assurance documentation. These records are important to the entity in the sense that it ensures compliance with industry-specific regulations, such as Good Agricultural Practices (GAP) or Good Manufacturing Practices (GMP), and sustainability, safety, and ethical standards. 2.​ Inquiries are necessary audit procedures which obtain information from people in the organization directly about processes, controls, and risk. This technique is applied to question management, employees, and other stakeholders with regard to issues that may not be clear to the auditor for further clarification or to verify any documentation of such processes. It assists the auditors to get some qualitative information that might not be revealed by the records alone, like insight into the company culture, potential fraud risks, or even the reasons behind some decisions. In life sciences and agricultural entities, interviews and inquiries play a critical role in understanding complex and specialized operations. For example, auditors may interview research scientists to gain clarity on compliance with Good Laboratory Practices (GLP) or ask farm managers about pest control measures and sustainability practices. These interactions can also help auditors verify whether employees are adhering to regulatory requirements and internal policies. By combining interviews with other audit techniques, auditors ensure they have a comprehensive view of the organization, enabling them to assess the effectiveness of controls, identify potential red flags, and make well-informed recommendations. 3.​ Observation in auditing involves the auditor physically witnessing processes, activities, or events relevant to the audit objective. This direct engagement offers a unique perspective, strengthening the auditor's understanding and enhancing the reliability of their conclusions. 4.​ Analytical procedures become an essential audit procedure in agricultural entities due to their ability to provide insights through the analysis of financial and non-financial data. Analytical procedures involve evaluating financial information by studying relationships among both financial and non-financial data. In agricultural entities, these procedures help auditors identify unusual trends, variances, or inconsistencies that may indicate potential issues. For example, auditors may analyze the relationship between crop yields and revenue to detect discrepancies that warrant further investigation. They also compare current financial data with historical data, industry benchmarks, and budgeted amounts to assess the reasonableness of reported figures. These procedures can be particularly effective in identifying risks related to weather conditions, market price fluctuations, and operational efficiency. This approach enhances the overall effectiveness and efficiency of the audit process in agricultural entities. [C] DISCUSSION OF TEST OF CONTROLS Auditor’s Study and Evaluation of Internal Accounting Controls ​ The internal accounting controls that are appropriate for agricultural producers are similar to those appropriate for entities engaged in manufacturing. Controls normally exist over the producer's major transaction cycles, such as purchasing, sales, and payroll. In addition, the producer normally maintains controls over production activities that provide reasonable assurance that costs are appropriately allocated to inventories and self-constructed assets. Reliance on Internal Accounting Controls: ​ The AICPA's Professional Standards described the auditor's study and evaluation of internal accounting controls as a basis for reliance thereon in determining the nature, extent, and timing of audit tests to be applied in the examination. At a minimum, the auditor should obtain an understanding of the producer's control environment and the flow of transactions through the accounting system.  ​ If, after this preliminary review, the auditor plans to rely on the system of internal accounting control, the review should be completed, and compliance tests should be performed to determine whether control procedures are suitably designed to provide reasonable assurance that they will prevent or detect errors or irregularities Importance of Internal Controls -​ It is essential for assisting companies in adhering to rules and regulations and mitigating fraud. Additionally, they can also improve operational efficiency by verifying budget adherence, implementing established procedures, identifying potential capital shortages, and producing accurate reports for management. Reasons for Implementing Controls: ​ Regulatory Compliance ​ Financial Accuracy ​ Inventory & Asset Management ​ Fraud Prevention ​ Sustainability & Environmental Responsibility ​ Operational Efficiency: Ensure quality control in crop and livestock production. Why We Need to Test Controls -​ To assess the effectiveness of an organization’s internal controls, assuring that financial, operational, and regulatory systems function properly. Reasons for Testing Controls: ​ Ensure Reliability of Financial Reporting ​ Assess Compliance with Regulations ​ Prevent Fraud ​ Support Decision-Making ​ Maintain Investor and Stakeholder Confidence [D] DISCUSSION OF SUBSTANTIVE AUDIT PROCEDURES Substantive Audit Procedures ​ These procedures focus on obtaining sufficient and appropriate audit evidence to support the auditor’s opinion. 2 Main Types: 1.​ Tests of Details - verifying individual transactions, balances, or disclosures to ensure they are free from misstatements. 2.​ Substantive Analytical Procedures - involve the use of comparisons, ratios, and trends to identify unusual fluctuations or inconsistencies. Specific Audit Procedures: Particulars Auditing Considerations Field and Row Background and Unique Characteristics: Crops ​ Field and row crops with cycles of less than one year are generally classed as annuals. These crops include wheat, barley, milo, corn, soybeans, sugar beets, tobacco, cotton, crops raised for seed, tomatoes, lettuce, beans, cabbages, and melons. Accounting Principles for Field & Row Crops:  ​ Crop-growing costs are accumulated until harvest. Harvested crops are valued at the lower of cost or market unless industry practices permit market valuation under specific conditions (SOP 85-3). Cost centers can be by field, crop, ranch, or geographic area. Allocate costs to inventories using direct costs (material and labor) and indirect costs. ​ Most costs related to producing field and row crops benefit only the current-year crop. Long-term resources benefiting multiple years (like engineering and grading) are capitalized and amortized over their useful lives. ​ Generally, farming procedures undertaken after the current year harvest benefit the crop of the succeeding year ​ In some agricultural operations a field or row crop is raised for use in the development of another product, such as crops grown for feeding livestock, cost will be part of livestock maintenance costs. Auditing Considerations: a.​ Planning stage → When planning the engagement, the auditor should inquire about the farming procedures and become familiar with the overall operation and any unusual events and practices. b.​ Specific audit procedures → The auditor should consider performing the following audit procedures for harvested and growing field and row crops: 1.​ Physically observing and reviewing crop maturity and quality 2.​ Confirming the existence of harvested crops stored in outside warehouses (see SAS No. 1, sec 331.14, as amended by SAS No. 43) 3.​ Reviewing and testing the capitalized costs of growing and harvesting crops for reasonableness 4.​ Determining that capitalized costs of crops do not exceed market Orchards and Background and Unique Characteristics: Vineyards ​ Orchards and groves produce such commodities as citrus, walnuts, almonds, pecans, peaches, pears, apples, apricots, cherries, and avocados. There are many varieties and subvarieties of each. The term vines, for this purpose, refers primarily to grape vines, of which there are several hundred varieties. Auditing Considerations: ​ Audit procedures for orchards and vineyards are similar to those performed for other types of property, plant, and equipment and may include— 1.​ Considering the relative health and conditions of the trees or vines. 2.​ Reviewing the estimated remaining productive lives of the trees or vines. This may require an annual inspection of the orchard or vineyard, and, when questions arise, the auditor may need to consult a specialist. 3.​ Testing total capitalized costs of orchards and vineyards to determine whether such costs are recoverable. In performing such tests, comparisons should be made with prevailing costs for similar orchards and vineyards and with data obtainable from state agricultural universities, agricultural extension services, and commodity and trade organizations. Intermediate-L Background and Unique Characteristics: ife Plants ​ Intermediate-life plants include perennial plants and vines that have growth cycles of more than one year. Such plants include artichokes, asparagus, various types of bush berries, kiwifruit, alfalfa, and grazing grasses. Those plants are produced for more than one year, depending on the type of plant and the geographic area, but not as long as trees and vines. Auditing Considerations: ​ Audit procedures for intermediate-life plants are similar to those performed for other types of property, plant, and equipment, and may include—  1.​ Physically observing the condition of the plants. 2.​ Testing accumulated costs for properly capitalized amounts. 3.​ Comparing accumulated costs to prevailing costs for similar plants. 4.​ Testing accumulated costs for recoverability. If there is a question about the future productive capability of the plants, it may be necessary to consult a specialist. (For example, unusually heavy rainfall or inadequate drainage may have "drowned" all or a substantial portion of an alfalfa planting [an intermediate-life plant]; in this case, the auditor should consider whether the remaining deferred costs of that crop are recoverable and may need to consult a specialist.) 5.​ Testing the useful lives or depreciation rates used in accounting for the plants. Actual or anticipated production declines may lead to a revision of useful lives or depreciation rates. Breeding and Background and Unique Characteristics: Production ​ Breeding herds consist of mature and immature male and female animals, Animals either of registered or commercial grade, that are maintained for their progeny. Registered herds are used to preserve or improve the desirable characteristics of the animals, and commercial herds provide animals for consumption. ​ Production animals provide a service or primary product other than their progeny. Examples are dairy cows (milk), poultry (meat and eggs), and sheep (meat and wool). Accounting Principles for Breeding Animals: ​ Initial Measurement: Breeding animals are initially measured at cost. Included in the total cost to be allocated to the animal produced are costs of feed, veterinary care, medicines, labor, land and pasture rent, and depreciation of the herd and facilities. The total capitalized costs of raised breeding animals, including interest required to be treated as a cost under FASB Statement No. 34, should generally not exceed the estimated external purchase price of such animals. ​ Subsequent Measurement: Breeding animals are generally fixed assets and their costs should be depreciated over their useful lives. Auditing Considerations for Breeding Animals: ​ Major audit objectives for breeding animals include establishing the existence and proper valuation of the animals. The auditor may choose to perform audit procedures such as— 1.​ Physically observing the animals. 2.​ Reviewing and testing the applicable acquisition and accounting records. 3.​ Reviewing the reasonableness of the useful lives of the animals, the depreciation rates, and salvage values. The reasonableness of useful lives should be reviewed in light of the experience of similar operations in the same geographical area. 4.​ Observing and performing counts of animals. Special audit risks exist where animals are left on grazing areas or open ranges. In those situations, the auditor may need to perform or observe counts at interim periods or may decide to use the services of a specialist. (See SAS No. 11.) Test counts should be used only in those circumstances where internal controls and periodic independent observations have conclusively proven the integrity of the accounting system and related internal controls. 5.​ Consider the use of a specialist where it is necessary (a) to identify breeds; (b) to read brands, tattoos, ear tags, earmarks, and other special identification marks; or (c) to evaluate the quality of the animals.  Accounting Principles for Production animals: ​ Measurement: Generally, production animals are fixed assets subject to depreciation procedures described for breeding animals. The principles are similar to group depreciation methods applicable to other fixed assets. Auditing Considerations for Production Animals: ​ Audit procedures for production animals with extended productive lives are similar to those for breeding animals and other fixed assets. They include— 1.​ Testing capitalized costs. 2.​ Reviewing the reasonableness of depreciation policies, including lives, depreciation rates, and salvage values. 3.​ Testing depreciation calculations. 4.​ Applying other procedures described in the sections of this guide dealing with auditing considerations applicable to breeding animals and animals held for sale. Animals Held Background and Unique Characteristics: for Sale ​ Animals held for sale include all the progeny of the breeding herds except those retained for the expansion or replacement of existing herds. In some operations, young animals are purchased and maintained until they develop further and are sold. Animals held for sale are usually not retained beyond the time they reach optimal size or weight because their value usually does not increase thereafter and may even decrease. Auditing Considerations: ​ The audit procedures applied in animal-feeding operations should be designed to deal with the special audit risks resulting from the lack of documents to evidence the ownership of raised animals. Possession of the animals does not necessarily establish ownership. Evidence of ownership of raised animals may be obtained by performing tests that apply the usual productivity rates to the number of breeding animals. The presence of animals without indication of ownership or purchase records should alert the auditor to the possible existence of a leasing or profit-sharing arrangement. Records of feed consumption may provide an indication of the total number of animals in the possession of the producer. Moreover, the client representation letter should contain an affirmation of ownership for the recorded number of animals. ​ In addition, the auditor should review the adequacy of the accounting system and related internal controls, and consider performing the following audit procedures: 1.​ Observing test counts or total counts of animals held for sale, depending on the adequacy of controls. 2.​ Testing the costs capitalized for the animals. 3.​ Obtaining reliable estimates of the weight and quantity of the animals for valuation purposes. 4.​ Testing the net realizable value of the animals by reference to quoted market prices. Consideration should be given to local market prices that may differ from regional prices. Land Background and Unique Characteristics: Development ​ The following discussion of land development costs is limited to Costs development costs applicable to the creation of productive assets possessing identifiable value and expected to create future income. These costs generally include costs of changes to make land suitable for general agricultural use, but they may also include improvements to land already used for agricultural production. Examples of land development activities are clearing brush, removing rocks, and leveling.  Auditing Considerations: ​ The main audit objectives for land development costs are to obtain evidence that costs have been properly capitalized and properly classified as permanent or limited life and that the useful lives and salvage values assigned are reasonable. Accordingly, the auditor should consider performing the following audit procedures: 1.​ Testing the capitalized costs by reference to cost accounting records 2.​ Reviewing the capitalized assets for proper classification 3.​ Reviewing the reasonableness of depreciation policies REFERENCES: ​ American Institute of Certified Public Accountants. Agribusiness Special Committee, "Audits of agricultural producers and agricultural cooperatives (1987); Audit and accounting guide:" (1987). Industry Developments and Alerts. 224. https://egrove.olemiss.edu/aicpa_indev/224 ​ Karim Abitago. (2021). Audit of Agricultural Entities. Studocu. https://www.studocu.com/ph/document/polytechnic-university-of-the-philippines/bachelor-of- science-in-accountancy/01-audit-of-agricultural-entities/18785727 ​ Komarek, A. M., De Pinto, A., & Smith, V. H. (2019). A review of types of risks in agriculture: What we know and what we need to know. Agricultural Systems, 178, 102738. https://www.sciencedirect.com/science/article/pii/S0308521X18312034