Problem: 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.
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.
b. Describe the trends identified by performing analytical procedures in the gross operating cycle, the net operating cycle, and gross margin.
X1 X2 X3 X4 X5
Building supply revenues $ 90,100 $ 99,380 $ 117,468 $ 137,085 $ 160,800
Lumber brokerage revenues $ $ $ 45,021 $ 63,480 $ 90,141
$ 90,100 $ 99,380 $ 162,489 $ 200,564 $ 250,941
Inventory turn days
Building supplies 32 34 31 33 27
Lumber brokerage 7 6 6
Gross margin
Building supplies 20.1% 18.5% 18.6% 19.1% 18.0%
Lumber brokerage 3.9% 4.1% 4.2%
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?
CTI Selected Financial Information ($000)
20x1 20x2 20x3 20x4 20x5
Accounts receivable, net $ 837 $ 1,335 $ 1,121 $ 962 $ 822
Inventory $ 1,025 $ 1,327 $ 1,099 $ 1,003 $ 1,027
Accounts payable $ 164 $ 380 $ 225 $ 201 $ 175
Sales $ 3,780 $ 5,638 $ 4,623 $ 4,022 $ 3,905
Cost of sales $ 1,812 $ 2,691 $ 2,399 $ 2,095 $ 1,859
Gross margin $ 1,968 $ 2,947 $ 2,224 $ 1,927 $ 2,046
comprehensive case