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Analytical Procedures Casuccio Aurora Manufacturing Inc.

(Analytical procedures) The following data was taken from the production and account­ing records for Casuccio Manufacturing, Inc.

From the book, Modern Auditing 8th Edition, Part 4: Auditing the Transaction Cycles. Chapter 15: The Expenditure Cycle (Pages 729-730) Q15-23 and Chapter 14: The Revenue Cycle (Page 675) Q14-26.

Operating Data
Capacity in Units

450,000

450,000

450,000
Production in Units 450,000 400,000 300,000
Inventory in Units 32,000 28,000 21,000
Financial Data ($000)
Total Revenues $ 35,200 $27,500 $21,200
Total Assets $23,000 $ 19,500 $15,700
Accounts Receivable, Net $5,900 $4,300 $3,900
Bad Debt Expense $175 $135 $105
Accounts Receivable Written Off $165 $125 $100

Required

1. Calculate the following ratios for 20x9, 20x8 and 20x7:
a. Sales to total assets b. Sales to production
c. Revenue per unit sold
d. Accounts receivable growth to sales growth
e. Uncollectable accounts expense to net credit sales
f. Uncollectable accounts expense to accounts receivable written off g. Accounts receivable turn days
2. a. Describe the implications of the resulting ratios for the auditor's audit strategy for year 20x9.
b. What specific audit objectives are likely to be misstated?
c. How should the auditor respond in terms of potential audit tests?

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The following information was taken from the accounting records for Aurora Manufacturting, Inc.:
YEAR 5 YEAR 4 YEAR 3 YEAR 2 YEAR 1
UNAUDITED AUDITED AUDITED AUDITED AUDITED

Inventory
$525,000
$ 460,000
$ 390,000
$310,000
$ 225,000
Current Assets $1,350,000 $1,175,000 $950,000 $750,000 $ 600,000
Accounts Payable $115,000 $113,000 $ 97,500 $ 850,000 $ 70,000
Current Liabilities $ 545,000 $535,000 $ 440,000 $ 380,000 $320,000
Sales $2,700,000 $ 2,050,000 $1,750,000 $ t400,000 $ uoo,ooo
Cost of Goods Sold $1,650,000 $ 1)25,000 $1,025,000 $ 850,000 $ 725,000
Industry Median
Accounts Payable
Turn Days 31 30 29 30
Cost of Goods Sold to
Accounts Payable 10.7 11.2 10.9 11.1
Current Asset to
Current Liabilities 1.9 2.2 2.3 2.1

a. Calculate the following information and ratios for years 2, 3, 4, and 5:
Purchases
Accounts payable turn days
Cost of goods sold to accounts payable
Current ratio

b. Describe the implications of the resulting ratios for the auditor's audit strategy.
What specific audit objectives are likely to be misstated? How should the
respond in terms of potential audit tests?

Solution Preview

(see attached for excel sheet)

P15-33 Expenditure Cycle

See ratio analysis in excel, attached. Click in cells to see computations.

Implications of analytical review

The implications of the analytical review is that balances are not as expected. This signals higher risk. For instance, the auditor needs to review why sales and purchases are up about 35% from the prior year but AP is not. The days in AP is much higher than the industry and out of line with expectations given sales growth. For instance, look at AP as a percent of purchases. Except for the outlier in Year 2, this had been running just under 9%. Now it is 6.7%.

Also implied in the analytical review is that receivables may need attention. The current ratio is trending up, partially from AP not keeping up with growth, but also from AR not growing with sales. Also, the sharp increase in sales is always a risk signal, especially if the entire industry is not also enjoying such growth.

Audit Objectives

In the expenditure cycle, the risk is that items have been LEFT OFF, rather than included inappropriately. So, there is a risk that not all purchases have been accrued. Therefore, the specific audit objectives that are likely to be misstated are the ?completeness? of payables.
In the revenue cycle, the risk is that ...

Solution Summary

Your tutorial is 807 words plus an excel analysis of the accounts given and ratios requested. Click on separate tabs in excel to get analysis. Calculations are not explained but the computations can be viewed by clicking in the cells and seeing what was done (formulas are there).

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