When labor is a material part of inventory, auditors should emphasize substantive tests of transactions.

Question

Quizplus · Accepted Answer

This is because labor is considered a direct cost of production and directly impacts the cost of goods sold. As such, it is important to ensure that the transactions related to labor are recorded accurately in the inventory accounts. Substantive tests of transactions are designed to obtain evidence regarding the completeness, accuracy and validity of transactions affecting the financial statements.

When Labor Is a Material Part of Inventory, Auditors Should