Internal Audit Case Study
The analytical procedures are important tools for conducting an audit. The procedures can assist the auditors in understanding the business of the clients. Therefore, they are useful because they identify the potential risks and problematic areas that need greater and substantive attention of the auditors (Beasley, Buckless, Glover & Prawitt, 2012). If the analytical procedures are properly formulated, the auditor will be allowed to arrive at a precise expectation of the balance as per the books of the customers.
The purpose of the analytical procedures is for the ascertainment of the irregular transactions and events, financial ratios, figures, and the trends that can lead to the potential ramification of the financial statements and planning. First and foremost, the auditors have to acknowledge the information regarding the customers of Laramie Wire Manufacturing Company. In this case, the auditors will set up the average machine time at the beginning to the end to provide for an estimation of six hours. This is the timeframe that is just under the average of the company. The purpose of establishing this timeframe is to lead the auditor to believe that Laramie Company is efficient in preparing its machines for production processes.
Below are some of the analytical procedures that relating to the occurrence and assertion of the management evaluation. Therefore, the auditor has to determine whether the transactions in these account balances are realistic or not.
Receivable days increased from 48.4 days in 2010 to 56.3 days in 2011. Therefore, the auditor may be interested to find out the factors that have led to the increase in the number of receivable days.
Accounts payable
This account increased by 6.03% as from 2010. Therefore, this percentage increase in the payables account should alert the auditors to carry out further investigation on the inventory account balances.
Cost of goods sold
The cost of goods sold increased by 2.67% between 2010 and 2012. Therefore, this will lead to many questions concerning the two accounts. For instance, why did the increase in sales was not in proportion to the increase in the cost of sales? Another important question would be, Is Laramie Wire Manufacturing Company understanding its account balances on the cost of sales by applying improper calculation of COGS to increase its gross margin?
Finished product, plastic, and copper rod inventories
As per the case study, the balance in the account of finished products inventory, Plastic inventory, and the copper rod inventory increased by 40.75%, 34.34%, and 59.09% from 2010 to 2011 respectively. It is important to note that all the above accounts increased significantly. The auditors need to look deeply while investigating these accounts. Therefore, the auditors should be able to determine whether these significant increase in stocks were influenced by the expectation of the company to experience more sales in next year (2012) or it was influenced by the decreasing Market Price of the materials. Moreover, the auditor can ask the management of Laramie Wire Manufacturing Company why the company is having more inventories in 2012 as compared to the previous year (2010).
Expected value of copper rod and plastic inventories
According to the case study, Laramie Wire Manufacturing Company have plans to go for an Initial Public Offer (IPO) next year. Additionally, the auditor should determine the expected value of copper rod and plastic inventories and in the case of any variance, the auditor should be alerted for further action.
References
Beasley, M., Buckless, F., Glover, S., & Prawitt, D. (2012). Using Analytical Procedures in Audit Planning. Laramie Wire Manufacturing.
