An auditor is testing the 'Valuation' of inventory. The auditor notes that the client uses a standard cost system. Which of the following procedures is necessary to ensure the inventory is valued correctly?

Answer options:

Verify the count quantities to the perpetual records.

Review the analysis of variances between standard and actual costs and their allocation to inventory.

Confirm inventory held at third-party locations.

Review the segregation of duties in the purchasing department.

How to approach this question

Standard Costing requires Variance Analysis. If variances are ignored, inventory is wrong.

Full Answer

B.Review the analysis of variances between standard and actual costs and their allocation to inventory.✓ Correct

Review the analysis of variances between standard and actual costs and their allocation to inventory.

GAAP requires inventory to be recorded at cost (or Lower of Cost or Market). Standard costs are acceptable only if they approximate actual costs. The auditor must check that variances (difference between standard and actual) are properly handled.

Common mistakes

Ignoring the variance allocation.

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