You Are Assigned to the Audit of Hopewell Homebuilders, Inc

question 57

Essay

You are assigned to the audit of Hopewell Homebuilders, Inc., a new audit client. Hopewell uses a standard costing system for inventory accounting. What audit procedures are appropriate for evaluating the reasonableness of management's estimates and underlying assumptions used in a standard costing system?

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Definitions:

Spending Variance

The difference between the actual amount of money spent and the budgeted or planned amount of expenditure.

Cost Formula

An equation used to predict the total cost of production, combining both fixed and variable costs, based on the level of activity or volume.

Indirect Materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Variable Cost

is a cost that varies with the level of output or activity, such as raw materials or piece-rate labor.