Nicole Sheehy

Dr. Lee
Laramie Wire Manufacturing
27 November 2017

1. Preform analytical procedures to help you identify relatively risky areas that indicate the

need for further attention during the audit, if any.

a. Percentage Change in Accounts Payable – Accounts payable increased by 8.43%

from 2014 to 2013 (450,00-415,000=35000/415000=. 0843x100). This is a relatively small

change in inventory compared to the percentage change in inventory. This change in relation

with the change in inventory should alert the auditor to do some further investigations.

b. Percentage Change in Inventories - Total inventory increased by 58.75% in 2014.

2014: (1,554,500+2,480,000+220,000=4,254,500) 2013: (1,058,000+1,450,000+172,000 =

2,680,000) (4,254,500 -2,680,000/2,680,000=. 5875x100) this large increase in total inventory

should create red flags for the auditor and require further investigations.

c. Average Square Feet of Warehouse Space used by Copper Rod Inventory – Out of

the three types on inventories, the copper rod inventory is the only calculation that the auditor is

able to calculate. The calculations for the Plastics inventory and the finished goods inventory are

needed to make sure that enough warehouse space can be allocated for all types of inventory.

d. Increase in Plastic Inventory – Plastic inventory increased by 27.9%, yet, the market

price for plastic (per lb.) decreased from $0.19 to $0.12 in 2014.

2. Focus specifically on each of the following balance-related management assertions for

the inventory account: existence, completeness, valuation, and rights and obligation. Link

any risks you identified for this account in question 1 to the related management assertions.

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 Briefly explain identified risks for the inventory account that require further attention, if

any.

Existence – The space that the inventory should take up is greater than the space in the

company’s warehouse. The copper rod inventory alone is more than can fit in the inventory area

of the warehouse facility. The reports indicate that the company can hold about 5.5 million lbs.

of copper rod at the end of 2014. Each pallet can hold up to 1,250 lbs. of copper rod. Thus, there

must be 4400 pallets; each pallet is 5x5, or 25 square feet. 4400 times 25 feet equals 110,000 sq.

ft. of required floor space. The pallets are not able to be stacked; the inventory on the facility has

only 80,000 square feet (400,000 x 20%). Therefore, this proves that this area is not big enough

for the copper rod let alone the plastics and the finished goods. This raises a concern relating to

the existence assertion.

Completeness – The auditor must verify that all inventories have been recorded and

accounted for. In the warehouse, inventory is allocated to specific areas in the warehouse due to

location. However, this can be confusing and lead to misstatements regarding transactions and

what is accounted for. For example, the spools of finished goods inventory are stored next to the

raw materials inventory near the faculties loading and unloading docks. This can lead to

inventory not recorded correctly creating a completeness assertion.

Valuation – The plastics inventory is carried above market on the 2013 balance sheet,

rather than the lower cost or market. The market price dropped from $.19 to $.12 from 2013 to

2014. Plastics inventory in 2014 is 1 million lbs. If we multiply 1 million lbs. by $.12/lb. equals

a market value of $120,000. However, the inventory is carried at 220,000 in 2014 or about

$.22/lb. Due to valuation assertion being concerned with the proper valuation being place on

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 individual inventory, accounts receivable and accounts payable accounts, this would be a

valuation concern that the auditor needs to look into.

Rights and Obligations –The Company has control of their assets, which exist in

relation to the obligation to pay liabilities. The company’s total inventory increased by 58.75% in

2014, which increases concerns about whether or not they will be able to pay the liabilities

associated with that increase. This would be another issue that the auditor would want to further

look into.

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