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Sol_Students Ch21

Sol_Students Ch21 - 21-4 Cost accounting records are those...

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21-4 Cost accounting records are those which are concerned with the processing and storage of raw materials, work in process, and finished goods, insofar as these activities constitute internal transfers within the inventory and warehousing cycle. These records include computerized files, ledgers, worksheets and reports which accumulate material, labor, and overhead costs by job or process as the costs are incurred. Cost accounting records are important in conducting an audit because they indicate the relative profitability of the various products for management planning and control, and determine the valuation of inventories for financial statement purposes. 21-5 The most important tests of the perpetual records the auditor must make before assessed control risk can be reduced, which may permit a reduction in other audit tests are: 1. Tests of the purchases of raw materials and pricing thereof. 2. Tests of the cost accounting documents and records by verifying the reduction of the raw material inventory for use in production and the increase in the quantity of finished goods inventory when goods have been manufactured. 3. Tests of the reduction in the finished goods inventory through the sale of goods to customers. Assuming the perpetuals are determined to be effective, physical inventory tests may be reduced, as well as tests of inventory cutoff. In addition, an effective perpetual inventory will allow the company to test the physical inventory prior to the balance sheet date. 21-6 The continuation of shipping operations during the physical inventory will require the auditor to perform additional procedures to insure that a proper cutoff is achieved. The auditor must conclude that merchandise shipped is either included in the physical count or recorded as a sale, but not both. Since no second count is taken, the auditor must increase the number of test counts to determine that the counts recorded are accurate.
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21-7 The auditor must not give the controller a copy of his or her test counts. The auditor's test counts are the only means of controlling the original counts recorded by the company. If the controller knows which items were test counted, he or she will be able to adjust other uncounted items without detection by the auditor. 21-8 The most important audit procedures to test for the ownership of inventory during the observation of the physical counts and as a part of subsequent valuation tests are: 1. Discuss with the client. 2. Obtain an understanding of the client's operations. 3. Be alert for inventory set aside or specially marked. 4. Review contracts with suppliers and customers to test for the possibility of consigned inventory or inventory owned by others that is in the client's shop for repair or some other purpose.
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