Final answer:
Auditors should emphasize testing internal controls over proper classification of payroll transactions when labor is a material part of inventory valuation.
Step-by-step explanation:
When labor is a material part of inventory valuation, auditors should emphasize testing internal controls over proper classification of payroll transactions. This is because labor costs are an important component of inventory valuation, and any misclassification of payroll transactions can result in inaccurate inventory valuation. By testing internal controls, auditors can ensure that payroll transactions are properly classified, thus promoting the accuracy of inventory valuation.
For example, if labor costs are mistakenly categorized as overhead expenses instead of being included in the cost of goods sold, it can distort the financial statements and lead to incorrect inventory values. By focusing on the internal controls over the classification of payroll transactions, auditors can identify any errors or misstatements and take corrective measures to ensure accurate inventory valuation.
Therefore, the statement is true. Auditors should emphasize testing internal controls over proper classification of payroll transactions when labor is a material part of inventory valuation.