8-15| (Analytical procedures) In audit planning the audit of Construction Industry Resources, Inc., a building supply company. You have completed analytic procedures relevant to purchases and inventory. The results of these procedures are included in Figure 8.13.Figure 8.13. Selected Financial Information ($000) | X1| X2| X3| X4| X5| Building supply revenues| $ 90,100| $ 99,380| $ 117,468| $ 137,085| $ 160,800| Lumber brokerage revenues| $ —| $ —| $ 45,021| $ 63,480| $ 90,141| | $ 90,100| $ 99,380| $ 162,489| $ 200,564| $ 250,941| Inventory turn days| | | | | |
Building supplies| 32| 34| 31| 33| 27|
Lumber brokerage| | | 7| 6| 6|
Gross margin| | | | | |
Building supplies| 20.1%| 18.5%| 18.6%| 19.1%| 18.0%| Lumber brokerage| | | 3.9%| 4.1%| 4.2%|
Required * Analytical procedures show that inventory turnover decreased from 31–34 days to 27 days, and gross margins declined to the lowest level in five years. What might this indicate about the risk of misstatement with respect to inventory and inventory purchases?|
(Analytical procedures) In audit planning the audit of Circuits Technology, Inc. (CTI). CTI resells, installs, and provides computer networking products (client software, gateway hardware and software, and twinax hardware) to other businesses. Figure 8.14 provides some summary information from CTI's financial statements. Figure 8.14. CTI Selected Financial Information ($000)
| 20x1| 20x2| 20x3| 20x4| 20x5|
Accounts receivable, net| $ 837| $ 1,335| $ 1,121| $ 962| $ 822| Inventory| $ 1,025| $ 1,327| $ 1,099| $ 1,003| $ 1,027| Accounts payable| $ 164| $ 380| $ 225| $ 201| $ 175|
Sales| $ 3,780| $ 5,638| $ 4,623| $ 4,022| $ 3,905|
Cost of sales| $ 1,812| $ 2,691| $ 2,399| $ 2,095| $ 1,859| Gross margin| $ 1,968| $ 2,947| $ 2,224| $ 1,927| $ 2,046| Required
1. Calculate purchases, gross margin, inventory turn days, accounts receivable turn days, and accounts payable turn days for the years ended 20x2, 20x3, 20x4, 20x5. 2. Describe the trends identified by performing analytical procedures in the gross operating cycle, the net operating cycle, and gross margin. 3. If tolerable misstatement is $45,000 for inventory, develop an expectation range for inventory turn days. 4. With respect to inventory, what might these trends indicate about the potential misstatement in inventory?
(Components of internal control) The chapter identified five components of internal control. Listed below are specific control policies and procedures prescribed by Suntron Company. 1. Management gives careful consideration to the requisite knowledge and skills personnel need at all levels of the organization.Control enviornment 2. General controls and application controls are established in the electronic data processing department.Control activities 3. Management acts to reduce or eliminate incentives and temptations that might lead individuals to engage in dishonest or illegal acts.Monitoring 4. Management is alert to complaints received from customers about billing errors.Monitoring 5. Management gives special consideration to the risks that can arise from the use of information technology in the accounting system.Monitoring 6. Employees' responsibilities are assigned so as to avoid any individual's being in a position to both commit an error or irregularity and then conceal it. Control environment 7. IT management has designed controls to prevent unauthorized use of IT equipment, data files, and computer programs.Control activities 8. The processing of payroll includes a check on the total number of...