Case 8.1 Laramie Wire Manufacturing
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. 1.) 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...
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