1. Identify 3 5 internal considerations on each of the significant accounts identified above that will be helpful in preparation of the audit program for tests of controls of the company.

2. Identify 3 5 substantive audit procedures that an auditor can perform on each of the significant accounts above in order to gather sufficient appropriate evidence to support the auditors opinion on the fairness of the financial statements in accordance with identified financial reporting framework.

Inventories and Cost of Sales

SMC makes several different microchips and microchip components for use in computer manufacture. The production area is divided into five areas, with each area specializing in a particular product group. Production is done in batches according to orders placed with the company. The different types of products that the company manufactures all use similar raw materials which are stored in a single location. Finished goods are stored on a specially designed warehouse with a controlled environment to prevent it from being damaged. Each product is contained in a barcoded container that also stores the product information of the inventory.

The companys production process includes a lot of automation using specialized machineries but still requires a relatively large amount of labor for machine operations and quality inspection. Thus, the companys conversion costs are fairly evenly divided between direct labor and factory overhead. Overhead consists primarily of the costs of the production facilities and depreciation and maintenance on the machinery. The company uses a hybrid product costing system to accommodate both the continuous and homogenous nature of the manufacturing process and the fact that production runs are performed in separately identifiable batches.