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Wire Manufacturing

1. Perform analytical procedures to help you identify relatively risky areas that
indicate the need for further attention during the audit, if any.

2015 2016 % Change


Sales 8,150,000.00 8,450,000.00 3.68%
Cost of Sales 6,080,000.00 6,242,000.00 2.66%

Finished Goods Inventory 1,175,500.00 1,654,500.00 40.75%


Copper Rod Inventory 1,650,000.00 2,625,000.00 59.09%
Plastics Inventory 182,000.00 224,500.00 23.35%
Total Inventory 3,007,500.00 4,504,000.00 49.76%

Accounts Payable (For Inventory Purchases) 425,000.00 450,000.00 5.88%

Days Purchases in AP 44.20 43.60 -1.36%


Days Sales in Receivables 48.40 56.30 16.32%

Market Price of Insulated Wire 0.009 0.008 -11.11%


Market Price of Copper Rod 0.480 0.480 0.00%
Market Price of Plastics 0.190 0.120 -36.84%

Inventory Turnover 2.02 1.66 -17.79%


Average Inventory Period 180.55 219.62 21.64%
Inventory/ Sales 36.90% 53.30% 44.44%

2016 Cost of Copper (5.9 mil x 0.48) 2,832,000.00


2016 Cost of Plastics (1.1 mil x 0.12) 132,000.00

VW Mfg. Total Area (sq. ft) 500,000


Area allocated to FG and RM Inventory (25%) 125,000
Area occupied by Copper Rod Inventory based
on reported approximate units 2016 141,600
(5.9 mil / 1500 lbs x 36 sq. ft)
Discrepancy: 16,600
2. Focus specifically on each of the five management assertions (existence or
occurrence, completeness, valuation or allocation, rights and obligations, and
presentation and disclosure) for the inventory account. Link any risks you identified
for this account in requirement no. 1 to the related management assertion. Briefly
explain identified risks or issues for the inventory account that require further
attention, if any.

Based on the analytical procedures performed above, the following issues relative
to management assertions must be given attention by the auditors:

Valuation. Auditors must give attention to assertions on valuation due to various


drastic changes on inventory accounts specifically on the dramatic increase in inventory
and yet a relatively small change in accounts payable. Moreover, a red flag is raised
concerning the valuation of plastics inventory since market value determined by
multiplying market price and inventory quantity is less than the reported amount of
224,500. This is inconsistent with the accounting principle of valuing inventory at lower of
cost or net realizable value.

Existence. Issues on existence must also be taken into account by the auditors.
Accordingly, Copper Rod inventory is reported to be approximately 5.9 million pounds
stored in non-stackable pallets. Each pallet holds 1,500 lbs and measures a total of 36
sq. feet (6’x6’). Calculations show that 3,933 pallets must hold the total inventory of
copper rods. This is multiplied by the area occupied by each pallet thus 141,600 sq. ft.
must be occupied by the copper rod inventory alone. This is higher than the 125,000 sq.
ft. (500,00 x 25%) that is allocated to Inventory warehousing hence the red flag.

Issues on completeness, rights and obligations, and presentation and disclosure


were not found.