An auditor is testing the valuation of a nonissuer's inventory. The auditor notes that the company uses a standard cost system. Which of the following procedures is MOST appropriate to determine if the standard costs approximate actual costs?

Answer options:

Confirming the standard costs with the engineering department.

Tracing a sample of inventory items from the floor to the standard cost cards.

Reviewing and analyzing the standard cost variance accounts (material, labor, overhead) for the period.

Recalculating the inventory turnover ratio.

How to approach this question

Standard Costing: Standard is a guess. Variance is the error. If Variance is huge, the Standard is wrong. Check the Variance.

Full Answer

C.Reviewing and analyzing the standard cost variance accounts (material, labor, overhead) for the period.✓ Correct

To validate standard costs, the auditor should analyze the variances (Purchase Price Variance, Usage Variance, etc.). Significant variances indicate that the standard costs do not approximate actual costs and that the inventory balance may need adjustment.

Common mistakes

Focusing on the physical count (Option B) rather than the cost calculation.

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