8 16 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 Required a Calculate purchases gross margin inventory turn days accounts receivable turn days and accounts payable turn days for the years ended 20x2 20x3 20x4 20x5 Purchases 2002 2691 1327 1025 2993 2003 2399 1099 1327 2171 2004 2095 1003 1099 1999 2005 1859 1027 1003 1883 Gross margin 2002 5638 2691 2947 5638 52 2 2003 4623 2399 2224 4623 48 1 2004 4022 2095 1927 4022 47 9 2005 3905 1859 2046 3905 52 3 Inventory Turn over days 2002 1176 2691 365 159 5 2003 1213 2399 365 184 5 2004 1051 2095 365 183 1 2005 1015 1859 365 199 2 Accounts Receivable Turn over Days 2002 1086 5638 365 70 3 2003 1228 4623 365 96 9 2004 1041 5 4022 365 94 5 2005 892 188 365 83 3 Accounts Payable Turn over Days 2002 2993 272 11 00367647 365 11 00367647 33 1 2003 2171 302 5 7 176859504 365 7 176859504 50 8 2004 1999 213 9 384976526 365 9 384976526 38 9 2005 1883 188 10 01595745 365 10 01595745 36 4 b Describe the trends identified by performing analytical procedures in the gross operating cycle the net operating cycle and gross margin The inventory turnover days are growing and it takes a long time to turn over the inventory in 20X5 then in the previous years The accounts receivables turnover seems to take long in 20X3 20X4 and then 20X5 The gross operation cycle seem loner in 20X5 and the growth increase is not substantial and the net operating cycle has an increase in 20X5 because the turnover is quicker in account payable Gross margin has an increase of 5 which the sales has a increase more than compared to the cost of goods sold COGS 20x2 159 5 Inv turn over 70 3 AR turn over Gross Op cycle 229 8 33 1 AP turn over 196 7 Net oper cycle 522 Gross mar 20x3 184 5 96 9 281 4 50 8 230 6 481 20x4 183 1 94 5 277 6 38 9 238 7 479 20x5 199 2 83 3 282 5 36 4 246 1 523 c If tolerable misstatement is 45 000 for inventory develop an expectation range for inventory turn days 45000 1859 365 8 83 d With respect to inventory what might these trends indicate about the potential misstatement in inventory Due to the tolerable misstatement is 8 days and the increase in inventory from 20X4 to 20X5 is more it could be a chance of the inventory having misstatement The backup by the lower purchases and the gross profit margin increases and then it shows a possible sales have increase 10 32 Components of internal control Internal controls can be categorized using the following framework 1 Control environment 2 Risk assessment 3 Information and communication 4 Control activities 4 1 Authorization 4 2 Segregation of duties 4 3 Information processing controls 4 3 1 Computer general controls 4 3 2 Computer application controls 4 3 3 Controls over the financial reporting process 4 4 Physical controls 4 5 Performance reviews 4 6 Controls over management discretion in financial reporting 5 Monitoring 6 Antifraud programs and controls Required Part A Indicate the category of internal control applicable to each procedure using the framework above Enter ONLY the number associated with the category of internal control a 1 b 4 6 c 4 3 1 d 5 e 2 f 1 g 4 3 1 h 4 3 2 i 4 5 j 4 3 2 k 5 l 3 m 2 n 4 3 3 Required Part B b Identify an assertion to which each procedure pertains some procedures may have a pervasive impact on multiple assertions a presentation or disclosure b presentation or disclosure c existence or occurrence valuation rights obligations completeness presentation or disclosure d existence or occurrence completeness valuations e existence or occurrence valuation rights obligation completeness f existence or occurrence valuation rights obligations completeness presentation or disclosure g existence or occurrence valuation rights obligations completeness presentation or disclosure h existence or occurrence valuations completeness rights obligations i existence or occurrence valuations completeness j existence or occurrence k existence or occurrence l existence or occurrence valuation rights obligations completeness presentation or disclosure m existence or occurrence valuation rights obligations completeness presentation or disclosure n existence or occurrence valuation rights obligations completeness presentation or disclosure 11 21 Assessing control risk An auditor is required to obtain a sufficient understanding of each of the components of an entity s system of internal control to plan the audit of the entity s financial statements and to assess control risk for the assertions embodied in the account balance transaction class and disclosure components of the financial statements Required a Explain the reasons an auditor may assess control risk at the maximum level for one or more assertions embodied in an account balance An auditor can assess the risk of control in an organization and can determine the effectiveness This is important when assertion is in play The risk of control is determine as high or low and will determine how must to assessment that is needed b What must an auditor do to support assessing control risk at less than the maximum level when the auditor has determined that controls have been placed in operation There are controls that can affect the financial statement and less than the maximum level is involves the testing of the organization controls and there are decision that shows the effectiveness in the controls and focuses on what is affects by the financial statements but not the nonfinancial controls c What should an auditor consider when seeking a further reduction in the planned assessed level of control risk An auditor looks for way to reduce the planning assessed level of risk of control the auditor will research other evidence and can be just effective in performing the test of control By doing all will ensures that the final control risk assessment is reduced but there is still evidence d What are an auditor s documentation requirements concerning an entity s system of internal control and the assessed level of control risk There are many areas that require the documenting and entity s system and the auditor will evaluate the environment control look at all information and communication of the organization look at all control activities monitoring actual steps and determine if there is risk