The quantity and type of materials are tested by

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and the price of the materials. The quantity and type of materials are tested by reviewing the engineering specifications for the product. Labor costs require evidence about the type and amount of labor needed for production and the labor rate. The amount of labor necessary to assemble a product can be tested by reviewing engineering estimates, which may be based on time-and-motion studies or historical information. The labor rates for each type of labor necessary to assemble a product can be tested by examining a schedule of authorized wages. Overhead costs are tested by reviewing the client's method of overhead allocation for reasonableness, compliance with GAAP, and consistency. The auditor examines the costs included in overhead to ensure that such costs are appropriate costs assignable to the product and that the inclusion or exclusion of such costs is consistent from one period to the next. 13-11 During the observation of the physical inventory count, the auditor should perform the following procedures: Ensure that no production is scheduled. Or, if production is scheduled, ensure that proper controls are established for movement between departments in order to prevent double counting. Ensure that there is no movement of goods during the inventory count. If movement is necessary, the auditor and client personnel must ensure that the goods are not double counted and that all goods are counted. Make sure that the client's count teams are following the inventory count instructions. Ensure that inventory tags are issued sequentially to individual departments. If the client uses another method of counting inventory, such as detailed inventory listings, the auditor should obtain copies of the listings prior to the start of the inventory count. Perform test counts and record a sample of counts in the working papers. 13-3
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Chapter 13 - Auditing the Inventory Management Process Obtain tag control information for testing the client's inventory compilation. Tag control information includes documentation of the numerical sequence of all inventory tags and accounting for all used and unused inventory tags. Obtain cutoff information, including the number of the last shipping and receiving documents issued on the date of the physical inventory count. Observe the condition of the inventory for items that may be obsolete, slow moving, or carried in excess quantities. Inquire about goods held on consignment for others or held on a "bill and hold" basis. The auditor must also inquire about goods held on consignment for the client. 13-12 Possible causes of book-to-physical differences include: Inventory cutoff errors. Unreported scrap or spoilage. Pilferage or theft. 13-13 Example disclosure items for inventory and related accounts include: Cost method (FIFO, LIFO, retail method).
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  • Spring '12
  • Na
  • inventory management process

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