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The following data was taken from the production and accounting records for Casuccio Manufacturing, Inc.
|Capacity in units||450,000||450,000||450,000|
|Production in units||450,000||400,000||300,000|
|Inventory in units||32,000||28,000||21,000|
|Financial Data ($000)|
|Accounts receivable, net||$5,900||$4,300||$3,900|
|Bad debt expense||$175||$135||$105|
|Accounts receivable written off||$165||$125|
2023 2022 2021
Sales to total assets 1.53 1.41 1.35
Sales to production 0.08 0.07 0.07
Revenue per unit sold 1.10 0.98 1.01
Accounts receivable growth to sale growth 1.33 0.35
Uncollectible accounts expenses to net credit sales 0.0050 0.0049 0.0050
Uncollectible accounts expense to accounts receivable written off 1.06 1.08 1.05
Accounts receivable turnover in days 61.18 57.07 67.15
1. Describe the implications of the resulting ratios for the auditor’s audit strategy for the year 2023.
2. What specific assertions are likely to be misstated?
3. How should the auditor response in terms of potential audit tests?
Note: Completed calculated
The following table provides solutions to the quantitative requirements in parts a through g:
Units sold in 20X9 is derived as follows: ($28,000 + $450,000) - $32,000 = $446,000
Receivables are growing faster than sales. In addition, sales price per unit has gone up and the ratio of sales to total assets has increased. This might be evidence of problems with revenue recognition. In addition, during this period of accounts receivable growth, accounts receivable turnover days increased during the last year, and the uncollectable account expense to account receivable write-off has gone down. The auditor should also consider whether the allowance for doubtful accounts is adequate.
The assertions that are likely to be misstated are: (1) the occurrence of revenues and the existence of receivables, (2) and the valuation of receivables and their net realizable value.
The auditor is most likely to test the existence of receivables and the occurrence of related revenues with confirmations to customers. The auditor is most likely to use audit data analytics to test the valuation of receivables at net realizable value, along with using hindsight to evaluate the collection of receivables.
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