Week 4 Individual Assignment
o Please complete 8-15 , 8-16, 10-31, 10-32 and 11-21
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.
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?
From an auditor’s view, all points lead to the inventory being used up faster. The auditor must decide why the inventory usage is speeding up. This increase in inventory usage or the shortage of inventory could be a sign of theft. In reviewing the table the gross margin is decreasing which adds to the theory or judgement call of theft. The auditor through analytical processes should consider and look at risks due to fraud. With this judgement, assets may be misappropriated.
8-16 (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.
a. Calculate purchases, gross margin, inventory turn days, accounts receivable turn days, and accounts payable turn days for the years ended 20x2, 20x3, 20x4, 20x5.
b. Describe the trends identified by performing analytical procedures in the gross operating
cycle, the net operating cycle, and gross margin.
The trend indicates for the 20x5 the collection time is gets better and there in an increase in inventory days and gross margin in four years.
c. If tolerable misstatement is $45,000 for inventory, develop an expectation range for
inventory turn days.