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.
Required
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?
(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.
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a. Calculate purchases, gross margin, inventory turn days, accounts receivable turn days, and accounts payable turn days for the years ended 20×2, 20×3, 20×4, 20×5.
b. Describe the trends identified by performing analytical procedures in the gross operating cycle, the net operating cycle, and gross margin.
c. If tolerable misstatement is $45,000 for inventory, develop an expectation range for inventory turn days.
d. With respect to inventory, what might these trends indicate about the potential misstatement in inventory?
10-31 (Components of internal control) The chapter identified five components of internal control.
Listed below are specific control policies and procedures prescribed by Suntron Company.
1. Management gives careful consideration to the requisite knowledge and skills personnel need at all levels of the organization.
2. General controls and application controls are established in the electronic data processing department.
3. Management acts to reduce or eliminate incentives and temptations that might lead individuals to engage in dishonest or illegal acts.
4. Management is alert to complaints received from customers about billing errors.
5. Management gives special consideration to the risks that can arise from the use of information technology in the accounting system.
6. Employees’ responsibilities are assigned so as to avoid any individual’s being in a position to both commit an error or irregularity and then conceal it.
7. IT management has designed controls to prevent unauthorized use of IT equipment, data files, and computer programs.
8. The processing of payroll includes a check on the total number of hours submitted. If more than 65 hours are reported in a weekly pay period, the transaction is printed on an exception report and put in a suspense file for additional review or additional authorization.
9. Suntron’s internal audit staff periodically assesses the effectiveness of various ICS components.
10. Policy manuals, accounting and financial reporting manuals, and a chart of accounts have been developed and implemented.
Required
a. Identify the components of internal control to which each policy or procedure relates.
b. For each item, identify one other policy or procedure for that internal control component that is not on the preceding list.
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