You Are Conducting the Audit of Files R Us Inc

question 21

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:

Unit Conversion Cost

The cost incurred to transform raw materials into finished goods on a per unit basis, including both direct labor costs and manufacturing overhead.

Materials Cost

The total expense incurred for materials that are used in the production of goods or services.

Work in Process

Inventory that is in the production process but is not yet completed.

Equivalent Units

Equivalent units are a concept in cost accounting used to apportion costs to partially completed goods, calculating them as if they were finished units.