Posted: May 1st, 2016

What specific audit objectives are likely to be misstated?

Required

1. Calculate the following ratios for 20×9, 20×8 and 20×7:
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 20×9.
b. What specific audit objectives are likely to be misstated?
c. How should the auditor respond in terms of potential audit tests?

—————–

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?

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