Analytical Procedure - Laramie Wire Manufacturing

The objective of analytical procedures is to identify the existence of unusual transactions and events, and amounts, ratios and trends that might indicate matters that have financial statement and audit planning ramifications*. First, the auditors should consider information regarding the industry in which the client operates**. In this case, average machine setup time from start to finish is approximately six hours, which is slightly below the industry average. It means the company is efficient in preparation for production. Also, the auditors should compare client data with prior period data***. For example, days sales in receivables increased from 48.4 days (2004) to 56.3 days (2005). Though sales didn't increase a lot ,but days sales in receivables increased a lot. There may be customers who are not paying due to defective products they purchased. The auditors need to look at accounts receivable aging report and returns that are not processed timely by reviewing returns. Plus, finished goods, copper rod, and plastic inventories increased as a percent of sales. The auditors need to have a question if they are expecting to have more sales and make sure that the company's standard cost for copper and plastics are reasonable. Companies usually updates their standard costs every year. If they updated their standard costs properly, maybe they just have more inventories. The auditors should ask the company why they have more inventories than last year. Finally, Because the company is planning to go on an IPO next year. The auditors need to audit sales account carefully. Company tends to overstate their revenue. Also, they need to make sure that their COGS accounts are accounted properly. Company tends to increase their gross margin so that they appear to be more efficient than they are. Furthermore, the auditors need to make sure that all the asset accounts are not overstated and liability accounts are not understated.

2.

Management assertions are implied or expressed representations by management about classes of transactions and the related accounts in the financial statements. As focusing on each of the five management assertions for the inventory account, we discovered that there are some risky areas that indicate the need for further attention during the audit. First of all, for existence or occurrence, all items in the inventory account must physically exist and be available for sale. Thus, the auditors should physically count