Audit Inventory Account for Laramie Wire Manufacturing

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Category: Business and Industry

Date Submitted: 05/16/2013 01:10 PM

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

• Based on the information given, Laramie Wire Manufacturing is planning to go on an IPO next year, which increase the pressures on management to meet earning targets. So, the auditor needs to spend more time on Sales account to check if there is an overstatement.

Accounts 2005 2004 Dollar change % change

Sales $8,450,000 $8,150,000 $300,000 3.68%

Cost of Sales $6,242,500 $6,080,000 $162,500 2.67%

Gross margin $2,207,500 $2,070,000 $137,500 6.64%

• By simple comparison between the account balance for the current year and the previous year, we noticed that Sales increased by 3.68% and Cost of Sales increased by 2.67%. The question is why did the cost of sales not increase in the same proportion as the sales? Is the company understating its Cost of Sales account by using improper COGS calculation method to increase Gross Margin?

Accounts 2005 2004 Dollar change % change

Finished Goods Inv. $1,654,500 $1,175,500 $479,000 40.75%

Copper Rod Inv. $2,625,000 $1,650,000 $975,000 59.09%

Plastics Inv. $244,500 $182,000 $62,500 34.34%

Market Price of Copper Rod $0.480 $0.480 $0 -

Market Price of Plastics $0.120 $0.190 ($0.07) (36.84%)

• According to the above table, the account balance of finished goods inventory, copper rod inventory, and plastic inventory increases by 40.75%, 59.09%, and 34.34% respectively from 2004 to 2005. All of those three inventory accounts increased significantly. With a Therefore, we need look deeply and do more investigation on those accounts. The auditors should determine whether this significant increase on inventory caused by their expectation to have more sales in next year or caused by the decreasing of Market Price of materials. The auditor can ask the company management why they have more inventories than last year. Also, we could calculate the company inventory turnover and...