Auditing

Case 8.1 Laramie Wire Manufacturing * Days Sales in Receivables
Days Sales in Receivables increased 16% from 2007 to 2008. There may be customers who are not paying due to defective products they purchased. The auditors need to verify that the receivables exist, are properly valuated, are within the cutoff period “timing” for the audit and the amount is correct for uncollectable accounts. Test controls that all incoming receivables have been processed and are complete.

* Cost of Sales
The cost of sales increased 3% from 2007 to 2008 compared the sales increased 4% in the same period. That ratio is consistent and we do not believe there is anything that should stand out to the auditor.

* Inventories
The plastics inventory increased 23% although Copper Rod inventory increased 59%.
Finished Goods Inventory increased 41% from 2007 to 2008. The price of plastics decreased from $0.19 to $0.12 and the price of copper rod stayed the same so that can explain the difference between how much they grew.
The expected value of Copper Rod = 5,900,000*.48 = 2,832,000
The expected value of plastics = 1,100,000 * .12 = 132,000

The expected value of plastics is not consistent with carrying costs at lower of cost or market pricing. This area needs to be checked by the auditor.

The square footage allotment also needs further attention.
25% (125,000sq.ft) is allocated to warehousing. Currently the copper rod inventory alone would demand 141,000 sq. ft. which is more than is allocated for the entire inventory.

For completeness, the auditors should make sure that all existing inventories have been recorded completely, go to the warehouse and ensure all the inventories are recorded in the inventory ledger.

* Accounts Payable
The accounts payable increased 6% while inventories increased much higher. This is not consistent and the