Chapter 8-16 Lesson

 b. Important trends for 20x5 (the likely year about to be audited) further involve a significant increase in inventory turn around, the increase in gross margin to the best result in the four year period, and an escalated collection period

c. There are scenarios in which tolerable misstatements in the inventory are turned by the auditor through the process of calculating the inventory turn days using the following formula: Tolerable Misstatement / Cost of Goods Sold * 365 = 45 / 1,859 * 365 = 7.84 days

d. The largest changes in the 20x5 include the combined decrease of purchases and increased gross margins increasing to 52.4%, while inventory turn days also increases significantly, increasing to 199 days. The adjustment from a 183 day inventory into199 inventory turn is significant and the results are further detailed in the example below. This is possible evidence for the overstatement of the inventory and will eventually lead to errors in counting, calculating errors, or errors because of fraudulent financial reporting.

Control | Category | Assertion(s) |

| | |

a. Management has set up a code of conduct that includes rules related to

conflicts in the interest of purchasing agents. | 1 | existence and occurrence |

b. Waterfront has successfully set up a disclosure committee which is

designed to examine the selection of new accounting policies. | 4.6 | Valuation and allocation, Presentation and Disclosure |

c. All computer program revisions must be approved by user

departments once the testing is complete for the entire test data | 4.3.1 | Virtually any assertion |

d. Management for every Waterfront´s manufacturing departments

must be reviewed and the expenditures have to be charged to the

responsibility center on a weekly basis. | 4.3.5 | existence and occurrence, Completeness, Valuation and Allocation |

e. The CEO, CFO, and controller review the financial consequences of

business risks annually to guarantee that the controls are in...