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.
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...