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How do unreasonable standard costs affect the financial statements, or huge variances affect users of the FS

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How do unreasonable standard costs affect the financial statements, or huge variances affect users of the FS

Do standard costs affect the financial statements if they are not used to value inventory, but instead inventory is valued at actual costs. Or maybe a clearer explanation of standard costing, because i think they are estimates used before the actual costs are incurred, of which i may be wrong. Although i want to know how they are of effect, if at the end of the day the company at preparing their financial statements (FS) use the correct costs, and how do the variances affect the FS if they are vary vastly.

October 15th 2014 AN ACCA USER 660 Points

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Financial statement is presented by management which reflects operational, investing and financial 3Es (efficiency, economic and effectiveness) position for the period prepared.
Operational 3Es relate management accounting(F2) to financial accounting(F7) whereas investing and financial 3Es relate financial management(F9) and financial accounting(F7).
Audit is an act of reviewing management work (based on accounting framework as well as internal and external compliance) and giving an opinion that financial statement is fairly prepared. Audit just not overlooks the surface figure presented in financial statement but drills down to basic level to come to the conclusion that financial statement prepared is true and fair. Financial audit overlaps operational/internal audit, value for money and compliance audit.
Standard costs are prepared at the beginning of the period based on past data and variance is the difference between actual and standard costs calculated at the end of period. Standard costing is "A control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance". Therefore, it is often used in operational audit.
During audit auditors on their own match past period figures with recent period figures taking past figures as an standard and calculate variance in order to check the fairness of the figure presented in recent financial statements. Where they find doubt that the figure are overstated they drill down to find the cause for the variances. Variance analysis is an audit tool.
In statement of financial position inventory is valued at lower of cost or net realisable value.
By the end of the period the company use actual cost or net realisable value does not necessarily mean that the presented figure is a result of economic, efficient and effective operation. Standard cost is used to check the validity of actual cost. However, the problem is sometimes management deliberately over/under estimate standard cost/target in order to achieve predetermined standard.
Where there are vast variance there can be fraudulent activities involved in collusion or in isolation. The business may also be facing operating difficulties of nature which should be disclosed in financial statements and so on...

October 17th 2014 AN ACCA USER 8,730 Points 1 Flag
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So basically you are saying standard costing is for setting a standard for production at which management expects actual results are not differ much from those set on the standard costing which in turn are designed to improve the 3E's of the business, considering all things normal, without any adverse intentions from management. Which means huge variances may indicate a risk of material misstatement.
So my question now, is if the above is true, then when is inventory valued at the standard costs estimates as it seems from your explanation they are merely estimates. Please bear with me, i really want to understand this concept. I only want to know where they fit in the AFS, since they are only estimates, in fact why would you value at standard cost when actual amounts are there.
Apart from that, you really know your F8, how is this, as I can see you are also a ACCA volunteer, have you qualified? Oh and please be patient with me.
October 20th 2014 AN ACCA USER 660 Points
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Where financial statement is a forecast for the period ahead inventory at the end of forecast period is valued at standard cost. Management often forecast/project financial statement as per the requirement of financial institution to seek financial support.

Normally, at the end of the period inventory in ASF is valued as per IAS 2. (i.e. lower of cost or net realisable value). Costs here does not stands for standard cost that is actual cost for production of finished goods or the purchase price of raw materials.
Standard costing, variance analysis, pricing policies, budgeting, forecasting........ are managerial tools used by management to squeeze out profit from the market by reducing cost and improving business processes.
For manufacturing industries the value of inventory in AFS represent large proportion of assets. Therefore audit overlooks process of procurement, processing and  stock of raw material and finished goods.
And finally I like you to know that I have no audit related experiences, its been long since I appeared F8 exam and did P1,2,3,4,5 not P7.
October 22nd 2014 AN ACCA USER 8,730 Points
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Thanks Subash, that's great, you are of great help to me, are you working now and what made you choose P4 & P5. How did you do it, i mean how did you manage to pass everything please give advice and if you were using on-line videos please share them with me on dropbox, i really need them and can't afford them. You sound really good for someone with no audit experience.
So from the above you mean the only time standard cost affect AFS is when the inventory is valued at the standard cost levels, say for instance that particular company will be using those AFS for financial aid. Therefore, this meaning standard costs don't necessarily affect year end inventory balances, since inventory will be valued at cost.
Then the only time we would have to ascertain the reasonabilty of standard costs is when inventory is valued at these rate, apart from that we would not normally review their reasonability.
October 22nd 2014 AN ACCA USER 660 Points
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Thabiso, I guess you have gone through F8 syllabus and until now you have covered all the syllabus and are in your revision stage. If not, I would like you to check F8 syllabus.
Link: http://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f8/studyguides/f8-sg-d14-j15.pdf
On page 4 of the syllabus you see how paper F8 is linked to other papers F7, F4, P1 and P7. That means part of fundamental knowledge of F8 comes form F4 and F7 and is advanced to P1 and P7. However, conceptual knowledge from every other papers (F1, F2, F3, F5, F6) is also relevant for audit.
Take an example: By just looking the organisational (power) structure and auditor can judge the risk at the planning stage of audit. Where organisational power structure is part of F1 syllabus, I mean at this stage the examiner does not expect us to describe the structure but at the same time want to see we are aware of this. The same goes with other papers as well.
Once you go through this I like you to go through all technical articles available and keep yourself updated.
I did self-study for all papers. It's hard. I used Kaplan and BPP text books, syllabus for reviews, technical articles, exam kits, past papers.
For videos I used opentuition and youtube. When I used opentuition I often used video capturing program using them in future as my internet connection is slow and the videos in opentuition is not downloadable.I guess you too as well use OPENTUITION.COM - iTS FREE AND COOL  
So from the above you mean the only time standard cost affect AFS is when the inventory is valued at the standard cost levels, say for instance that particular company will be using those Forecast Financial Statement (not AFS) for financial aid. Therefore, this meaning standard costs don't necessarily affect year end inventory balances, since inventory will be valued at cost in AFS.Then the only time we would have to ascertain the reasonabilty of standard costs is when inventory is valued at these rate in Forecast/Projected Financial Statement.
Take an easy example of expenditure variance:
Last year end electricity expenditure was $1000
From the beginning of the year the company had doubled its operation.
Management set standard electricity expenditure  to $2000
By the end of the period the expenditure reached to $3000
Financial statement by the end of the period records $3000
Than as an auditor ask yourself what an auditor does in this circumstance.
The same thing goes with inventory as well.
I guess first we see the materiality to the financial statement.
If material we design audit procedure
Check if the electricity price per unit has gone up
Ask management report on how standard was set (if available) or set our own standard
Verify operation schedules has doubled and ...........

And remember where to use verbs like; audit, check, verify, recalculate, review, reexamine,.... don't use a single verb everywhere in answer sheet.
October 23rd 2014 AN ACCA USER 8,730 Points
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