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ANSWER KEY

1. The objective of analytical procedures is to identify the existence of unusual


transactions and events, and amounts, ratios and trends that might indicate matters
that have financial statement and audit planning ramifications. First, the auditors
should consider information regarding the industry in which the client operates. In
this case, average machine setup time from start to finish is approximately six hours,
which is slightly below the industry average. It means the company is efficient in
preparation for production. Also, the auditors should compare client data with prior
period data. For example, days sales in receivables increased from 48.4 days (2004)
to 56.3 days (2005). Though sales didnt increase a lot, but days sales in receivables
increased a lot. There may be customers who are not paying due to defective products
they purchased. The auditors need to look at accounts receivable aging report and
returns that are not processed timely by reviewing returns. Plus, finished goods,
copper rod, and plastic inventories increased as a percent of sales. The auditors need
to have a question if they are expecting to have more sales and make sure that the
companys standard cost for copper and plastics are reasonable. Companies usually
update their standard costs every year. If they updated their standard costs properly,
maybe they just have more inventories. The auditors should ask the company why
they have more inventories than last year. Finally, because the company is planning to
go on an IPO next year, the auditors need to audit sales account carefully. Company
tends to overstate their revenue. Also, they need to make sure that their COGS
accounts are accounted properly. Company tends to increase their gross margin so
that they appear to be more efficient than they are. Furthermore, the auditors need to
make sure that all the asset accounts are not overstated and liability accounts are not
understated. Neo
2. Management assertions are implied or expressed representations by management
about classes of transactions and the related accounts in the financial statements. As
focusing on each of the five management assertions for the inventory account, we
discovered that there are some risky areas that indicate the need for further attention
during the audit. First of all, for existence or occurrence, all items in the inventory
account must physically exist and be available for sale. Thus, the auditors should
physically count finished goods, copper rod, and plastic inventories, and determine
actual increase of inventories at year end. Also, they should select items from the
inventory ledger and locate them and reconcile the quantity. Second, for
completeness, the auditors should make sure that all existing inventories have been
recorded completely, go around the warehouse and ensure all the inventories are
recorded in the inventory ledger. Third, for valuation or allocation, the auditors should
make sure that Laramie Wire manufacturing sticks with one valuation method (For
inventory items, valuation is based on the lower of cost or market value, with several
alternative methods for calculating cost), find out if there is any scrap inventory that
needs to be recorded and written off, and ask about obsolescence items. Fourth, for
rights and obligations, the auditor should ask them if there is any consigned inventory
at their warehouse. If there is, those inventories should not be recorded in the
companys inventory ledger. Finally, for presentation and disclosure, the auditors

should review the companys financial statement and ensure that their disclosure is
consistent with their current processes. Eon

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