Question

AP12.2 (LO 2)  Analytical procedures The following information was taken from the accounting records for Aurora Manufacturing, Inc.:

	Year 5 Unaudited	Year 4 Audited	Year 3 Audited	Year 2 Audited	Year 1 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	85,000	70,000
Current liabilities	545,000	535,000	440,000	380,000	320,000
Sales	2,700,000	2,050,000	1,750,000	1,400,000	1,200,000
Cost of goods sold	1,650,000	1,225,000	1,025,000	850,000	725,000
Industry Median
Accounts payable turnover days	31	30	29	30
Cost of goods sold to average accounts payable	10.7	11.2	10.9	11.1
Current ratio	1.9	2.2	2.3	2.1

Required

1. Calculate the following information and ratios for years 2, 3, 4, and 5:

   1. Purchases.

   2. Accounts payable turnover in days.

   3. Cost of goods sold to average accounts payable.

   4. Current ratio.

2. Describe the implications of the resulting ratios for the audit strategy in year 5. What specific audit objectives are likely to be misstated? How should the auditor respond in terms of potential audit procedures?

Answer 1