During the completion of an audit, a sample is selected and then evaluated against some criteria to determine whether the auditor believes the financial statements to be correct and in accordance with Generally Accepted Accounting Principles (GAAP). One of the three important steps in the audit process, after the client has been accepted, is to plan the audit. In this stage, analytical procedures are very important to identify high risk areas which should be tested more intensively. These procedures are used to evaluate whether or not the five main management assertions are being followed. The five assertions are existence or occurrence, completeness, valuation or allocation, rights and obligations, and presentation and disclosure.
With the financial data which has been provided by the inexperienced staff assistant the most obvious analytical procedure to start with is to compare the 2005 financial date with the 2004 financial data. By analyzing the two years against each other, I have noticed that it appears Laramie Wire may be building up their inventory stores. I state this because their finished goods inventory has went up from $1,175,500 to $1,654,500 in just that one year. This is an increase of finished goods inventory of 40%. This is something which I believe significant attention should be paid to. The management criteria which I believe is applicable to this issue is the valuation or allocation assertion. In the planning of this audit I would advise the staff accountants to make a physical count of inventory. Because it is known how much inventory is stored on the spools, how much room they take up, and how many there are; by using the cost rate structure also provided by the staff accountant the resources to determine the actual finished goods inventory are provided.
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