Inherent Risk, Tests of Controls, and Substantive Procedures

INHERENT RISK, TESTS OF CONTROLS, AND SUBSTANTIVE PROCEDURES
1 After reviewing the trial balance, calculate the following ratios for Cloud 9 as of
1/31/2021, 1/31/2022, and 10/31/2022:
* Accounts payable turnover in days. [365 / (Cost of sales / Yr. End A/P)]
1/31/2021 - [365 / (207,838,462 / 20,915,385)] = 36.7310
1/31/2022 - [365 / (222,496,154 / 20,615,385)] = 33.8195
10/31/2022 - [365 / (169,346,154 / 14,986,457)] = 32.3010
* Cost of goods sold to average accounts payable. (Cost of sales / Yr. End A/P)
1/31/2021 - (207,838,462 / 20,915,385) = 9.9371
1/31/2022 - (222,496,154 / 20,615,385) = 10.7927
10/31/2022 - (169,346,154 / 14,986,457) = 11.2999
* Payables as a % of total assets. (Yr. End A/P / Total assets)
1/31/2021 - (20,915,385 / 225,915,385) = 9.28%
1/31/2022 - (20,615,385 / 223,830,769) = 9.21%
10/31/2022 - (14,986,457 / 241,192,238) = 6.21%
* Current ratio. (Total current assets / Total current liabilities)
1/31/2021 - (151,175,962 / 82,307,693) = 1.84
1/31/2022 - (151,895,192 / 68,719,231) = 2.21
10/31/2022 - (163,869,231 / 66,494,150) = 2.4
* Any other ratios and information that you believe would be appropriate to evaluating inherent risk for purchase transactions and accounts payable balances.
Quick ratio:
1/31/2021 - (70,142,308 / 82,307,693) = 0.83
1/31/2022 - (74,053,846 / 68,719,231) = 1.08
10/31/2022 - (83,931,779 / 66,494,150) = 1.26
According to the examination of horizontal trends, we see that, the Accounts Payable declined by 1.43% between January 2021 and January 2022, and that it decreased by 28.35% by October 2022. In addition, Cost of sales increased by 7.05% from January 2021 to January 2022, but by October 2022, it reduced by 18.52% (Johnson et al., 2019).
2 Based on your analysis of information gathered
* Identify high inherent risk assertions for purchases transactions and accounts payable.
All of these aspects of purchase transactions— There is a great deal of uncertainty surrounding statements made about Cloud 9 related to the occurrence of buying, the completion & the accuracy of purchases, and the buy cut-off. The accuracy of payables and their value are two areas of accounts payment where there is a significant possibility of adverse outcomes being asserted (Johnson et al., 2019).
* Evaluate inherent risk for purchase transactions and accounts payable. Explain why you have identified various assertions as high or maximum risk for accounts payable
Management pressure to underestimate costs and payments is just one of several widespread elements that increase the likelihood of fraud in the purchase process. Employee fraud through cash transfers is another danger inherent to the purchasing and expenditure process. A large volume of transactions, illegal purchases and cash disbursements, diverted assets, duplicate payments to vendors, and cut-off problems as a result of a failure to accrue obligations are all causes of material misstatements (AICPA, 2016).
Josh and Susie are concerned about the prospect of cut-off errors leading to unrecorded obligations, which is an inherent risk for both the fullness and cut-off of transactions. This is visible due to the 7% increase in cost of sales occurring in t...