Question

You are auditing Quick Technologies, Inc. (QTI). QTI is a manufacturer of various computer technologies and works hard on bringing new technologies to market. QTI has approximately 4,000 customers (some with multiple locations). On average, QTI sells its inventory every 45 days, and it takes approximately 33 days to collect receivables. QTI has also experienced a high degree of competitiveness and technological obsolescence. The company has found that the average product life is between 9 and 15 months.

Identify a potential application for ADA in the audit of QTI. Explain the account and the assertion(s) tested by the application.??

What is the population being analyzed and tested using ADA?

Is ADA being used as a risk assessment procedure or as a substantive test?

Explain the ADA application that is planned and how it will contribute to the evaluation of the assertion being audited.

Explain the role of business acumen in the application of ADA.​​​​​​​

Answer 1

Answer :

There is a variety of solutions to this question regarding Quick Technologies, Inc. (QTI). An auditor might use ADA as a risk assessment tool to look for slow moving inventory and inventory that might need to be written down (valuation and allocation). Alternatively, an auditor use ADA to look for slow paying customers when evaluating the allowance for uncollectable accounts (valuation and allocation). Finally, the auditor might use ADA to validate the existence of receivables by validating the receivables to subsequent cash receipts (existence assertion). The following example illustrates the answers for a though e in the context of using ADA to look for slow-moving inventory.

a.

ADA can be used to test inventory by looking at inventory turn days for each SKU number in inventory.

b.

The population being tested is total inventory on hand at the date of the test.

c.

In this case, inventory is being used as a risk assessment procedure.

d.

The information needed to implement this application is the number of units on hand in inventory, and the number of units sold during the year. Based on the auditor’s knowledge of the industry and QTI, the auditor must then identify an appropriate cutoff point at which inventory appears to be moving slowly (e.g., inventory that that has more than a 120day supply of inventory on hand). The auditor then needs to determine if there are good business reasons for holding a larger than normal supply of inventory for particular items. The auditor may then use ADA to identify sales prices associated with slow moving inventory during the period after the cutoff date and compare sales prices to the underlying cost of inventory to determine if there is a material net realizable value problem.

e.

Business acumen is particularly helpful in identifying false positives, items that have been identified as slow moving, when there is not an underlying net realizable value problem. The client might carry large amounts of inventory for a customer that purchases in large quantities, but not regularly. However, the auditor must evaluate the reasonableness of the business reason based on the auditor’s knowledge of the industry, and evidence of sales prices after year-end.