Final answer:
In inventory valuation, auditors should emphasize testing internal controls around fictitious employees, wage rate authorization, payroll transaction classification, and transaction completeness to ensure labor costs are accurate.
Step-by-step explanation:
When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing internal controls concerning several key aspects. These include fictitious employees, the authorization of wage rates, the proper classification of payroll transactions, and the completeness of recorded transactions. Focusing on these areas helps ensure that labor costs are accurately reflected in the inventory valuation and prevents potential misstatements due to fraud or error.
While all these controls are important, emphasis on controls around fictitious employees might be particularly relevant. This is because fictitious employees can lead to incorrect labor costs being included in inventory valuation, and can also indicate more systemic issues with internal controls. Ensuring that only authorized employees are paid and that their wage rates are properly authorized and recorded is key to accurate financial reporting.