ACCY 401 – Auditing Oxford Manufacturing Analytical Procedures

ACCY 401 – Auditing Oxford Manufacturing Analytical Procedures

Horizontal Analysis (Year-to-Year Changes)

	2019	2020	Increase/Decrease Amount	Percentage (%) Increase/Decrease
Cash at Hand	1,987.28	2,275.23	(287.95)	-14%
Inventory	18,825,205.24	67,724,527.50	(48,899,322.26)	-260%
Sales	4,497,583.20	11,100,220.89	(6,602,637.69)	-147%
Accounts Revivable	16,410,902.71	51,515,259.98	(35,104,357.27)	-214%
Cost of Goods Sold	141,569,221.61	4,240,263.09	137,328,958.52	97%
Accounts Payable	4,633,118.09	1,933,095.91	2,700,022.18	58%
Common Stock	7,423,000.00	8,105,000.00	(682,000.00)	-9%
Depreciation	133,000.00	446,000.00	(313,000.00)	-235%
Total	193,492,030.85	145,064,367.37	48,427,663.48	25%

Vertical Analysis (Common Size Financial Statement)

	2019	Percentage	2020	Percentage
Cash at Hand	1,987.28	0.00103%	2,275.23	0.00157%
Inventory	18,825,205.24	9.72919%	67,724,527.50	46.68585%
Sales	4,497,583.20	2.32443%	11,100,220.89	7.65193%
Accounts Revivable	16,410,902.71	8.48144%	51,515,259.98	35.51200%
Cost of Goods Sold	141,569,221.61	73.16540%	4,240,263.09	2.92302%
Accounts Payable	4,633,118.09	2.39447%	1,933,095.91	1.33258%
Common Stock	7,423,000.00	3.83633%	8,105,000.00	5.58717%
Depreciation	133,000.00	0.06874%	446,000.00	0.30745%
Total	193,492,030.85	100.00000%	145,064,367.37	100.00000%

From the common size analysis, Oxford Manufacturing is performing much better in 2020 in some areas than in 2019. For instance, there is an increase in cash at hand from 0.00103% to 0.00157%. There is a slight increase, implying that there are investments generating revenue but at a much slower rate. There is a need to expand the investment portfolio. Also, there is a huge decrease in the cost of goods sold. Oxford Manufacturing needs to increase its sales by enacting promotion strategies and product campaigns.

Financial Ratios

	2019	2020
Current Ratio	1.406350149	1.715590734
Quick Ratio	0.826092935	1.477046319

The current ratio, also referred to as the liquidity ratio, indicates its ability to pay short-term obligations. The current ratio in 2020 is higher than that of 2019, indicating that Oxford’s Manufacturers could pay their debts in 2020 than in 2019. Quick ratio measures the short-term liquidity of the company. The quick ratio in 2020 was higher than in 2019, indicating that Oxford Company is better positioned to handle the liquid assets.

GA-4

Based on the horizontal analysis of the trial balance of Oxford Manufacturing, several problems have been identified. The base year for the horizontal analysis is 2019. The cash at hand for Oxford Manufacturing is -14 % (GA-4-1). The negative value shows a decrease in the cash at hand from the 2019 financial year to 2020. There is a need to further investigate the investment of the organization that is resulting in the negative value of cash at hand. One thing that jumps out from the year-to-year analysis is the difference between the accounts receivable and payable. The accounts receivable is negative 214% (GA-4-2), while the accounts payable is positive 58% (GA-4-3). That indicated that Oxford Manufacturing is doing a good job in paying out its debts, but they are not effective in collecting the debts that other organizations owe them. There is a need to balance the accounts receivable and accounts payable to remain solvent in the business. The inventory is also negative in a value represented by 260% (GA-4-4). The possible problem would be that the organization is not keen on its computations. There are a lot of errors that have been made in the books of accounts of Oxford Manufacturing. A possible solution will be to hire an internal auditor to review the financial documents and locate the errors.

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ACCY 401 – Auditing Oxford Manufacturing Analytical Procedures

Oxford Manufacturing, Inc. is an audit case designed to introduce you to parts of the audit process. You are

asked to assume the role of a veteran of two-to-three “busy” seasons, “in-charging” for the first time.

While Oxford Manufacturing’s growth has been phenomenal (there has been a dramatic growth in unaudited net income over the past year), there are some concerns: the client doesn’t want your firm (Dewey, Cheatem & Howe (DCH)) to talk with the predecessor auditor, a labor strike is looming, and one of Oxford Manufacturing’s largest customers is suffering some financial difficulties.

Because of busy season, there is little help, other than from an untrained intern. While the intern can do “grunt work,” such as vouching and gathering information for you, he appears incapable of preparing working papers (WPs), making adjusting entries, or even getting good coffee and doughnuts. Assistance does come in the form

of an objective, competent internal audit staff. Communication between client personnel and other firm members takes the form of e-mail messages and memos from the engagement partner (Artie Andresson), the engagement manager (Danielle Woodlaw), the intern (Bentley Bumbler), and the director of Oxford’s internal audit department (Katrina Rodrigues).

You (actually your group) are the staff accountant on the Oxford Manufacturing audit engagement. Assume that DCH and Oxford have signed an engagement letter and all audit plans/programs have been prepared by Danielle Woodlaw, the engagement manager. Danielle has sent you the following memo asking you to perform some preliminary procedures using Oxford’s trial balances for 2019 and 2020. Your tasks are listed below.

1. Perform preliminary analytical procedures on the financial statements.
   • a. Perform horizontal (year-to-year changes) and vertical (common size financial statements) analyses using the provided trial balances.
   • b. Calculate appropriate financial ratios. Assume the market value of the common stock is $24 million in both the current and prior years. (10 points)
2. Write a memo (labeled GA-4) highlighting what you believe are potential problem areas. In other words, are there any significant changes from year-to-year that we might need to investigate further, or does anything jump out at you? Include printouts of your calculations from 1. above as support and label them GA-4-1, GA-4-2, etc. (You’re using GA-4 because other auditors have included other documents in the working paper file already – GA-1, -2, and -3.) (20 points)