You Are Conducting the Audit of Files R Us Inc

question 42

Essay

You are conducting the audit of Files R Us Inc.(FRI),a family-owned business that manufactures a variety of different wooden and metal file cabinets.In business for over twenty years,FRI has a reputation for providing high-quality products on time or even ahead of schedule.FRI does not sell to the public,but only to fine furniture stores and to a variety of office supply chains.
As of the current year-end,the company has a total of $6.3 million in assets.Inventory information is as follows:

File cabinet production is intensely competitive,primarily due to imports from Asia and Mexico.To help manage costs,FRI uses a job-order,standard cost system.Standard costs are assessed quarterly.Each job is costed and compared to standard.Inventory is counted only at the end of the year.There is no perpetual inventory system.
Due to problems with raw material quality and new staff,losses have been incurred in the last six months of the year.Your review of last year's audit file indicated that there were numerous inventory adjustments required last year.
Required:
Using the audit risk model,assess the risks associated with the audit of inventory.

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Definitions:

Factory Overhead Account

An accounting category that accumulates all the indirect costs associated with manufacturing, excluding direct materials and direct labor.

Credit Balance

A credit balance is the amount of money a financial account shows on the credit side, indicating funds received or owed to the account holder.

Jobs Completed

Refers to work or projects that have been finished within a specified accounting period.

Predetermined Overhead Rate

A rate used to allocate manufacturing overhead costs to individual units of product based on a specific costing activity.