Laramie Wire Manufacturing Case

1539 Words Mar 11th, 2011 7 Pages
Case # 1

Laramie Wire Manufacturing: Using Analytical Procedures in Audit Planning

February 18, 2011

Laramie Wire Manufacturing, a medium sized company, is planning an initial public offering of its stock in the next two to three years. Laramie operates in a single 500,000 square foot building complex. Laramie buys copper rod and plastic materials to produce insulated copper wiring. The building complex is composed of 3% office space, 57% production area, 15% shipping and receiving area, and 25% finished goods and raw materials inventory warehousing area. Laramie produces several different types and gauges of insulated copper wire. All the different products Laramie manufactures use the same raw materials, meaning raw
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Therefore, more testing is needed to see if the copper wire inventory was potentially overstated in the amount of pounds in 2008. Another risk for Laramie deals with the percentage of inventory it has on hand from 2008 to support the current amount of sales. Laramie’s inventory to sales percentage increased 16.4% from 2007 to 2008. Therefore, this increase shows either that Laramie has trouble keeping inventory accounts down or net sales are slowing relevant to the amount being produced. Also, the increase shows Laramie may have overstated inventories meaning there may be an existence issue. There is a need for further attention to the potential overstatement of inventories because the increase in inventory to sales shows that Laramie is not using its resources efficiently. When calculating the percentage change in inventories, an issue arises when using either the lower cost of market or the market value. When looking at the calculations for finished goods inventory (insulated wire) and copper rod inventory Laramie has applied the lower cost of market. However, the calculation pertaining to plastics inventory reveals that the market value should be used for classification, but Laramie has used cost. The percentage change of the plastics inventory if the $.12 per pound is used is a 27% decrease. The importance of classifying inventory correctly
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