Laramie Wire

Manufacturing
CASE 4
Members
Marie Montefalco
Ericka Etoquilla
Dave Vincent Go
Al-Misri Usman
Emmanuel Apuli
Introduction
Three general uses of analytical procedures:
1. Help the auditor understand a client’s business and are useful in identifying potential
risks and problem areas requiring greater substantive audit attention.
2. Allow the auditor to arrive at a precise expectation of what an account balance ought
to be
3. Useful in helping the auditor assess whether a client faces a going-concern issue and
whether a client’s financial statements “make sense” after required audit adjustments
are made.
Three stages of an audit that correspond to the three general uses of analytical procedures:
4. Planning
5. Evidence gathering
6. Final review
Background
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 Required

1. Perform analytical procedures to help you identify relatively risky areas that
indicate the need
for further attention during the audit, if any.
2. Focus specifically on each of the following balance-related management
assertions for the
inventory account: existence, completeness, valuation, and rights and
obligations. Link any
risks you identified for this account in question 1 to the related
management assertion. Briefly
explain identified risks for the inventory account that require further
attention, if any.
 Analytical Procedure
  2014 2013 %Increase/ Decrease
Sale 8,550,000 8,150,000 4.91%
Cost of Sales 6,150,000 6,000,000 2.50%
Finished Goods 1,554,500 1,058,000 46.93%
Inventory
Copper Road 2,480,000 1,450,000 71.03%
Plastic 220,000 172,000 27.91%
Percentage Change in 450,000 415,000 8.43%
AP
Days Purchase in A/P 25.4 Days 27.1 days 6.27%
Days Sales in 59.3 Days 47.9 days 23.80%
Receivable
Market Price of 0.007 0.009 -22%
Insulated Wire (per
foot)

Market Price of Copper 0.460 0.460 0%

Rod (per lb.)
Market Price of 0.120 0.190 -37%
Plastics (per lb.)
1.

Analytical procedures are evidence that are used during an audit. It can be done by doing comparison or using complex models such as
trend analysis, ratio analysis and regression analysis. First, the auditors should consider information and understand regarding the industry
in which the business operates. By understanding the production process, the auditor can identify the areas in the process that may
represent risk relevant in the audit. The second process would be compare the current and previous financial statement amounts. In this
case, the auditor would compare sales from 2013 and 2014. In the financial statements the company reported an increase on sales of
(4.91%). But the day’s sales in receivables increased from 47.9 days to 59.3 days. The company is planning to go to an initial public
offering (IPO) where the company stock is now known to the public. It changes many things about the way that management runs the firm
and can present opportunities and dangers for retail investors. This means that the auditors need to audit sales carefully as the company
tends to overstate their revenue account. Aside from that they must ensure to account properly the cost of goods sold. Whereas, it results
in the company to increase their gross margin so that they will look more efficient than they were before. Moreover, the auditor is
responsible for ensuring that there is no misstatement of accounts where assets are overstated and liabilities are understated. The auditor
should also consider comparing the market price of raw materials for insulated wires, copper rod, plastic to determine if the company is
able to pay an amount for the raw materials not over or under the standard price. The auditor should also consider checking the inventory
accounts in order to asses what are the possible areas in the inventory section that may provide significant risk such as by checking
whether the inventory transaction really occurred. Overall the auditor need to make sure that all assets accounts are recorded properly.
2. As we use the management assertions to account for inventory there are a lot of
scenarios that must be addressed.

a. Existence or occurrence, There should be a bar code system applied to all the inventory
to ensure that all the items can be easily accounted for. By doing so, the inventory will
not be misplaced, and will be a lot cheaper in the long run because then the inventory
won’t need to be physically accounted for. On an annual basis, certain items should be
manually counted to ensure accuracy.
b. Completeness, making sure that balance sheets and proper documentation is posted
and in right order. These may include, revenue recognition and inventory identification.

C. Valuation or allocation, make sure proper write-offs are accounted for and properly
recorded in the balance sheet. Ensure that Laramie uses the same valuation method
during its recording phase. If there needs to be items that are no longer being used, they
need to be allocated to its proper place.
2. As we use the management assertions to account for inventory there are a lot of
scenarios that must be addressed.

d. Rights and obligations, the auditor and the company have the obligation to disclose
findings and proper information to the public, especially if the company is going to become
an IPO. Ledgers need to be accurately stated and income statements need to be processed
in a timely efficient manner.

e. Presentation and disclosure, the auditors ensure that everything is consistent with the
findings and have been properly reviewed and all processes are securely stated.