Case 8.1 Laramie

The Laramie account is a big account. It is a big account because this is the first time they are having a full-scale audit of their financial statements and they are planning to go public and become an initial public offering (IPO). Since this is our first time this is happening we have to very careful with the analytical procedures. Analytical procedures are reasonableness test auditors compare their estimates of account balances with those recorded by management. Analytical procedures must be applied in the planning stages of each audit, according to auditing standards. After reviewing the data from 2010 – 2011 you noticed that all the accounts increase, expect for the both “Days” account, which decreased and the “market price for Copper Rod” which reminded the same. This information can raise a few questions for Laramie Company. For example, Sales increased by 4% ((8,8350,000-8,050,000)/8,050,000)*100)) from year 2010 to 2011, while in that same time span the Days Sales in Receivables increased by 16% ((55.8-47.9)/47.9))*100. Why aren’t these numbers closer in change? What did the company change about the policies on collecting their money, if any? Another flag that can be thrown and raise question is about the inventory. Even though the price of the plastic decreased and the inventory increased, we have to make sure it’s the right balance. Is the new price of inventory at the correct price and is the account receivables correct as well? What system are they using to create these figures? The examples I provide for analytical procedures are risk that can happen with the existence and valuation with management assertions. For existence you have to ask, “Did this really happen and are the valid on the balance sheet? “ Valuation assertion is the issue of each of individual inventory, accounts receivable, and accounts payable accounts have the correct values and are not over/under stated.

Existence and valuation assertions are the biggest concern with