Case 8. 1 Laramie Wire Manufacturing Auditing Standards AU 329 – Analytical Procedures– Analytical procedures consist of evaluations based on studies of financial and non-financial data. Auditors use analytical procedures for three reasons: planning the nature, extent, and timing of analytical procedures as a substantive test to obtain audit evidence about particular assertions related to account balances or classes of transactions as an overall review of the financial information in the following stage of the audit.
. ) Analytical Procedures: Inventory Estimates: To estimate inventory, one can multiply the cost per unit by the total units in the end of the year balance. Copper Rod costs $. 48 per pound, and Laramiereported that there were approximately 5. 9 million pounds of Copper Rods in its inventory. These facts lead us to an estimated Copper Rod Inventory balance of $2,832,000. Laramie’s 2008 inventory balance was $2,625,000, a -7.
89% difference from our estimate.We feel that this difference is relatively insignificant and do not feel the need to direct further attention to these Copper Rod Inventory balance during the audit. Plastics cost $.
12 per pound, and Laramiereported an approximate figure of 1. 1 million pounds in the inventory balance. This leads us to an estimated Plastics Inventory of $132,000; however, Laramie reported a balance of $224,500 balance. The reported amount is a 41. 2%increase over what we estimated the balance to be.We feel that this area needs extra attention during the audit to ensure that there is not a material misstatement in the Plastics Inventory balance. Prior-Period Comparisons: We found that the balance of Copper Rod Inventory increased from $1650,000 to $2,625,000. This is a substantial increase, and the auditor should pay particular attention to the Copper Rod Inventory balance in the audit program.
Finished Goods Analysis: We feel that the balance of finished goods is a significant risk area based on the information that we gained from our assistant manager.There are two spools of wires that are of a type recently banned by federal safety guidelines. We must inquire management about the two spools of wire being written off the books, and we should also examine the general ledger to ensure that the appropriate journal entry was made. 2. ) Existence– We estimated that the Plastics Inventory balance should be significantly less than the reported balance. Therefore, as an auditor, we should ensure that the amount of inventory actually exists.In order to do so, we should observe the amount of inventory to ensure of its existence.
Likewise, we should observe the copper rod inventory and their related accounting records to ensure that the balance of 2008’s copper rod inventory is accurate. Completeness– We should examine the paper trail of payments received on transactions related to wire, and check to see that the transactions were fully recorded to the general ledger. If inventory is not being written off as cost of goods sold at the time of sale, the inventory balance could be understated.
Relating to the finished goods, we should ensure that appropriate journal entries were made removing from inventory the amount of banned residential wire that is to be destroyed. Valuation– We should inquire management as to how they value their Plastics. It is likely that, since the 2007 price of plastic was 7 cents per pound higher, the company uses a LIFO system. Even still, if we use the beginning of the year’s cost of $. 19 (instead of the end-of-year $. 12) for plastic in our estimate for the ending Plastics Inventory balance, the estimated total calculates to $209,000, which is still 6. % less than we would expect. With regards to the Copper Rod inventory, we should make sure that Laramiedid not change the way that they valued Copper Rod inventory.
The price stayed the same at $. 48; however, the ending balance increased by nearly $1 million. We should make sure that this increase was not related to a misstatement but rather an increase in units on hand. Rights and Obligations – We should ensure that finished goods related to the two spools of wire recently banned by federal guidelines are not included in the finished goods inventory balance on the books.We can do this by examining the appropriate journal entries on the general ledger. Additionally, we should inquire management about the possibility of their being more of this newly-banned residential wire within their inventory balance.
Depending on Laramie’s reliance on these residential wires, the company could be overstating their finished goods inventory by hiding the fact that some of their existing finished goods balance contains additional spools of the banned wire.