Audit Palnning and Analitycal Procedures.doc

8/10/2019 Audit Palnning and Analitycal Procedures.doc

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Chapter 8

Audit Planning and Analytical Procedures

Review Questions

8-1 There are three primary benefits from planning audits: it helps the auditorobtain sufficient competent evidence for the circumstances, helps keep auditcosts reasonable, and helps avoid misunderstandings with the client.

8-2 Eight major steps in planning audits are:

1. Accept client and perform initial planning. !nderstand the client"s business and industry#. Assess client business risk$. %erform preliminary analytical procedures&. 'et materiality, and assess acceptable audit risk and inherent risk

(. !nderstand internal control and assess control risk). *ather information to assess fraud risks+. evelop overall audit plan and audit program

8-3 The new auditor -successor is re/uired by 'A' +$ -A! #1& tocommunicate with the predecessor auditor. This enables the successor to obtaininformation about the client so that he or she may evaluate whether to accept theengagement. %ermission must be obtained from the client before communicationcan be made because of the confidentiality re/uirement in the Code ofProfessional Conduct. The predecessor is re/uired to respond to the successor"sre/uest for information0 however, the response may be limited to stating that no

information will be given. The successor auditor should be wary if thepredecessor is reluctant to provide information about the client.

8-4 %rior to accepting a client, the auditor should investigate the client. Theauditor should evaluate the client"s standing in the business community, financialstability, and relations with its previous %A firm. The primary purpose of newclient investigation is to ascertain the integrity of the client and the possibility offraud. The auditor should be especially concerned with the possibility offraudulent financial reporting since it is difficult to uncover. The auditor does notwant to needlessly e2pose himself or herself to the possibility of a lawsuit forfailure to detect such fraud.

8-5 An engagement letter is an agreement between the %A firm and theclient concerning the conduct of the audit and related services. 3t should statewhat services will be provided, whether any restrictions will be imposed on theauditor"s work, deadlines for completing the audit, and assistance to be providedby client personnel. The engagement letter may also include the auditor"s fees. 3naddition, the engagement letter informs the client that the auditor cannotguarantee that all acts of fraud will be discovered.

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8! 5ecause the 'arbanes462ley Act of 77 e2plicitly shifts responsibility forhiring and firing of the auditor from management to the audit committee for publiccompanies, the audit committee is viewed as 8the client9 in those engagements.

8" All audit and non4audit services must be preapproved in advance by theaudit committee for public companies.

88 Auditors need an understanding of the client"s business and industry

because the nature of the business and industry affect business risk and the riskof material misstatements in the financial statements. Auditors use theknowledge of these risks to determine the appropriate e2tent of audit evidence toaccumulate.

The five major aspects of understanding the client"s business and industry,along with potential sources of information that auditors commonly use for eachof the five areas are as follows:

1. Industry and External Environment ;ead industry trade publications,A3%A 3ndustry Audit *uides, and regulatory re/uirements.

. Business Operations and Processes Tour the plant and offices,

identify related parties, and in/uire of management.#. Management and Governance ;ead the corporate charter and

bylaws, read minutes of board of directors and stockholders, andin/uire of management.

$. Client Objectives and Strategies 3n/uire of management regardingtheir objectives for the reliability of financial reporting, effectivenessand efficiency of operations, and compliance with laws andregulations0 read contracts and other legal documents, such asthose for notes and bonds payable, stock options, and pensionplans.

&. Measurement and Performance ;ead financial statements, perform

ratio analysis, and in/uire of management about key performanceindicators that management uses to measure progress toward itsobjectives.

8-# uring the course of the plant tour the %A will remember that animportant aspect of the audit will be an effective analysis of the cost system.Therefore, the auditor will observe the nature of the company"s products, themanufacturing facilities and processes, and the flow of materials so that theinformation obtained can later be related to the functions of the cost system.

The nature of the company"s products and the manufacturing facilities andprocesses will reveal the features of the cost system that will re/uire close audit

attention.


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8-12 5ecause of the lack of independence between the parties involved, the'arbanes462ley Act prohibits related party transactions that involve personalloans to e2ecutives. 3t is now unlawful for any public company to providepersonal credit or loans to any director or e2ecutive officer of the company.5anks or other financial institutions are permitted to make normal loans to theirdirectors and officers using market rates, such as residential mortgages.

8-13 3n the audit of a client previously audited by a different %A firm, it would

be necessary to obtain a copy of the corporate charter and bylaws for thepermanent files and to read these documents and prepare a summary abstract ofitems to test for compliance. 3n an ongoing engagement, this work has beenperformed in the past and is unnecessary each year. The auditor"s responsibilityis to determine what changes have been made during the current year and toupdate and review the summary abstract prepared in previous years forcompliance.

8-14 The information in a mortgage that is likely to be relevant to the auditorincludes the following:

1. The parties to the agreement. The effective date of the agreement#. The amounts included in the agreement$. The repayment schedule re/uired by the agreement&. The definition and terms of default(. %repayment options and penalties specified in the agreement). Assets pledged or encumbered by the agreement+. ?i/uidity restrictions imposed by the agreement@. %urchase restrictions imposed by the agreement17.6perating restrictions imposed by the agreement11. ;e/uirements for audit reports or other types of reports on compliance

with the agreement1.The interest rate specified in the agreement1#.Any other re/uirements, limitations, or agreements specified in the

document

8-15 3nformation in the client"s minutes that is likely to be relevant to the auditorincludes the following:

1. eclaration of dividends. Authoried compensation of officers#. Acceptance of contracts and agreements$. Authoriation for the ac/uisition of property

&. Approval of mergers(. Authoriation of long4term loans). Approval to pledge securities+. Authoriation of individuals to sign checks@. ;eports on the progress of operations

3t is important to read the minutes early in the engagement to identify items thatneed to be followed up on as a part of conducting the audit.


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8-1! The three categories of client objectives are -1 reliability of financialreporting, - effectiveness and efficiency of operations, and -# compliance withlaws and regulations. Each of these objectives affects the auditor"s assessmentof inherent risk and evidence accumulation as follows:

1. eliability of financial reporting ! 3f management sees the reliabilityof financial reporting as an important objective, and if the auditor

can determine that the financial reporting system is accurate andreliable, then the auditor can often reduce inherent risk and plannedevidence accumulation for material accounts. 3n contrast, ifmanagement has little regard for the reliability of financial reporting,the auditor must increase inherent risk assessments and gathermore evidence during the audit.

. Effectiveness and efficiency of operations This area is of primaryconcern to most clients. Auditors need knowledge about theeffectiveness and efficiency of a client"s operations in order toassess client business risk and inherent risk in the financialstatements.


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8-18 $continued%

material misstatements is then used to classify risks using the audit risk model todetermine the appropriate e2tent of audit evidence.

8-1# >anagement establishes the strategies and business processes followedby a client"s business. 6ne top management control is management"sphilosophy and operating style, including management"s attitude toward the

importance of internal control. 6ther top management controls include a well4defined organiational structure, an effective board of directors, and an involvedand effective audit committee. 3f the board of directors is effective, this increasesmanagement"s ability to appropriately respond to risks. An effective auditcommittee can help management reduce the likelihood of overly aggressiveaccounting.

8-2& Analytical procedures are performed during the planning phase of anengagement to assist the auditor in determining the nature, e2tent, and timing ofwork to be performed. %reliminary analytical procedures also help the auditoridentify accounts and classes of transactions where misstatements are likely.

omparisons that are useful when performing preliminary analytical proceduresinclude:

ompare client and industry data ompare client data with similar prior period data ompare client data with client4determined e2pected results ompare client data with auditor4determined e2pected results ompare client data with e2pected results, using nonfinancial data

8-21 Analytical procedures are re/uired during two phases of the audit: -1during the planning phase to assist the auditor in determining the nature, e2tent,

and timing of work to be performed and - during the completion phase, as afinal review for material misstatements or financial problems. Analyticalprocedures are also often done during the testing phase of the audit, but they arenot re/uired in this phase.

8-22 *ordon could improve the /uality of his analytical tests by:

1. >aking internal comparisons to ratios of previous years.. 3n cases where the client has more than one branch in different

industries, computing the ratios for each branch and comparingthese to the industry ratios.

8-23 ;oger >orris performs his ratio and trend analysis at the end of everyaudit. 5y that time, the audit procedures are completed. 3f the analysis was doneat an interim date, the scope of the audit could be adjusted to compensate for thefindings. 'A' &( -A! #@ re/uires that analytical procedures be performed inthe planning phase of the audit and near the completion of the audit.

The use of ratio and trend analysis appears to give ;oger >orris aninsight into his clientCs business and affords him an opportunity to providee2cellent business advice to his client.

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8-24 The four categories of financial ratios and e2amples of ratios in eachcategory are as follows:

1. S#ort%term debt%paying ability ash ratio, /uick ratio, and currentratio.

. &i'uidity activity Accounts receivable turnover, days to collectreceivables, inventory turnover, and days to sell inventory.

#. (bility to meet long%term debt obligations ebt to e/uity and times

interest earned.$. Profitability ! Earnings per share, gross profit percent, profit margin,

return on assets, and return on common e/uity

'ultiple Choice Questions (ro) CPA *+a)inations

8-25 a. -# b. - c. -$

8-2! a. -1 b. -$ c. -

8-2" a. -$ b. -1 c. - d. -$

,iscussion Questions And Prole)s

828 *enerally, the first step in preparing to supervise and plan the field workfor an audit is to review andDor study current and background informationon the client and industry. The most important sources in this preparatorystage are as follows:

1. Engagement letter . Audit permanent file

#. ?ast year"s audit files$. lient correspondence files&. ?ast year"s reports, including management letter andDor internal

control memorandum(. ?ast year"s in4charge auditor). 3ndustry and governmental publications+. A3%A industry audit guides or firm audit guides

The purpose of this preparatory review and study is to become familiar with suchthings as:

1. The client"s organiational structure, including key personnel.. 5usiness activities and special problems of the client or industry in

general.#. ;ecent financial data or other important activities such as new

security offerings or bond financing.$. The client"s records and procedures especially as they relate to

internal control.&. ;eports that are anticipated for this engagement.

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8-28 $continued%

After the above review, you should make preliminary plans for the fieldwork. ou need to determine what audit tests can be done on an interim basisand what must be done on or after the balance4sheet date, including tests thatshould be done on a surprise basis. ou must plan for what work can be done bythe client"s accounting andDor internal audit staff. ou should also schedulecritical dates for such things as cash counts, inventory observations, and

confirmations. ou should develop a detailed time budget and assign specificareas of the audit to each staff member on the engagement. Additionally, youshould consider whether you need special e2pertise, e.g., a computer specialist.

ou should prepare a preliminary draft of audit programs based on theprior year"s assessment of internal control and any related currentcorrespondence, as well as suggestions in last year"s audit files. 3t is oftenpossible to use last year"s audit programs as a start with revisions for changedconditions or desired audit emphasis then made.

3f possible, visit the client to meet the appropriate officers and employeesand discuss arrangements for the engagement and to learn about any significantchanges in the nature of the business and related business risks.

After completing the preliminary preparation as outlined above, you shouldschedule a conference with all staff members assigned to the audit. The agendawould include a review of the engagement letter, brainstorming about possiblefraud risk areas including how management might engage in and conceal fraud,discussion about the importance of professional skepticism, an estimate of thescope of work, review of reports to be issued, review of the primary businessoperations of the client, assignment of audit areas to the staff, and review ofspecific problems or difficulties that are anticipated for this engagement. After thismeeting, it is important to assure that each staff member has ade/uate time toreview and prepare for his or her assigned audit area.

A final step is to make sure that the necessary supplies, permanent files,

and prior year"s audit files are carefully packed, downloaded, and prepared fortransport to the client"s office. 3f there is still time before starting the work at theclient"s office, you can assign staff to set up audit schedule analyses and leadschedules.

8-2# a. A related party transaction occurs when one party to atransaction has the ability to impose contract terms that would nothave occurred if the parties had been unrelated.


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8-2# $continued%

1. The nature of the relationship or relationships.. A description of the transaction for the period reported on,

including amounts if any, and such other information deemednecessary to obtain an understanding of the effect on thefinancial statements.

#. The dollar volume of transactions and the effects of any change

in the method of establishing terms from those used in thepreceding period.

$. Amounts due from or to related parties, and if not otherwiseapparent, the terms and manner of settlement.

b.


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8-2# $continued%

. %erform analytical procedures of the nature discussed inhapters ) and + to evaluate the possibility of businessfailure and assess areas where fraudulent financial reportingis likely.

#. ;eview and understand the client"s legal obligations in the

manner discussed in this chapter to become familiar with thelegal environment in which the client operates.

$. ;eview the information available in the audit files, such aspermanent files, audit programs, and the preceding year"saudit documentation for the e2istence of material non4arm"s4length transactions. Also discuss with ta2 and managementpersonnel assigned to the client their knowledge ofmanagement involvement in material transactions.

&. iscuss the possibility of fraudulent financial reporting withcompany counsel after obtaining permission to do so frommanagement.

(. Bhen more than one %A firm is involved in the audit,e2change information with them about the nature of materialtransactions and the possibility of fraudulent financialreporting.

). 3nvestigate whether material transactions occur close toyear4end.

+. 3n all material transactions, evaluate whether the parties areeconomically independent and have negotiated thetransaction on arm"s4length basis, and whether eachtransaction was transacted for a valid business purpose.

@. Bhenever there are material non4arm"s4length transactions,

each one should be evaluated to determine its nature andthe possibility of its being recorded at the improper amount.The evaluation should consider whether the transaction wastransacted for a valid business purpose, was not undulycomple2, and was presented in conformity with itssubstance.

17. Bhen management is indebted to the company in a materialamount, evaluate whether management has the financialability to settle the obligation. 3f collateral for the obligatione2ists, evaluate its acceptability and value.

11. 3nspect entries in public records concerning the proper

recording of real property transactions and personal propertyliens.

1. >ake in/uiries with related parties to determine thepossibility of inconsistencies between the client"s and relatedparties" understanding and recording of transactions thattook place between them.

1#. 3nspect the records of the related party to a materialtransaction that is recorded by the client in a /uestionablemanner.

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8-2# $continued%

1$. Bhen an independent party, such as an attorney or bank, issignificantly involved in a material transaction, ascertain fromthem their understanding of the nature and purpose of thetransaction.

f.


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8-3& $continued%

b.

./(0R'A.0/ R**A/0 2&&5 A,. A,. AC.0/ R*Q.R*,

(eruary 151. Approval for increased

distribution costs ofF&77,777

uring analytical procedures, an increase ofF&77,777 should be e2pected for distribution costs.

. !nresolved ta2 dispute. Evaluate resolution of dispute and ade/uacy ofdisclosure in the financial statements if this is amaterial uncertainty.

#. omputer e/uipmentdonated.

etermine that old e/uipment was correctly treated in77$ in the statements and that an appropriatededuction was taken for donated e/uipment.

$. Annual cash dividend. alculate total dividends and determine thatdividends were correctly recorded.

&. 6fficers" bonuses.etermine whether bonuses were accrued at 14#147$ and were paid in 77&. onsider the ta2implications of unpaid bonuses to officers.

6epte)er 1!1. 77& officers elected. 3nform staff of possibility of related party transactions.

. 6fficers" salary

information.

Gote information in audit files for 77( audit.

#. %ensionDprofit sharingplan.

etermine if the pensionDprofit sharing plan wasapproved. 3f so, make sure all assets and liabilitieshave been correctly recorded.

$. Ac/uisition of newcomputer system.

etermine that there is appropriate accountingtreatment of the disposal of the 14year4old e/uipment.

Also trace the cash receipts to the journals andevaluate correctness of the recording.

&. ?oan. E2amine supporting documentation of loan and makesure all provisions noted in the minutes areappropriately disclosed. onfirm loan information withbank.

(. Auditor selection. Thank management for selecting your firm for the77& audit. 3f your firm has e2perience with pensionand profit sharing plans, ask management if there isanything they need help with regarding their newproposed plan.

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8-3& $continued%

c. The auditor should have obtained and read the


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8-32 a. The use of analytical procedures in an audit has two generaladvantages to a %A: 1 a broad view is obtained of the data underaudit, and attention is focused on e2ceptions or variations in thedata.

A broad view of the data under audit is needed by the %A todraw conclusions about the data as a wholesuch conclusionscannot be drawn by merely looking at individual transactions. Theapplication of analytical procedures to obtain this broad view

re/uires a discerning analysis of the data, which results in overallconclusions upon which the %ACs audit satisfaction rests. The %Ais thus able to satisfy himself or herself as to the reasonableness,validity, and consistency of the data in view of the surroundingcircumstances.

The focusing of the %ACs attention on e2ceptions orvariations in the data results in a more efficient and economicalaudit because there is a reduction in the amount of detailed testingwhich would be re/uired, in the absence of overall checks, touncover these e2ceptions or variations.


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8-32 $continued%

-f Erroneous cutoff of sales in a perpetual inventorysystem

-g !nrecorded purchases-h hange in inventory valuation method.

. The possible reasons for an increase in the number of daysCsales in receivables including the following:-a hange in credit terms

-b ecreasing sales-c hange in the sales mi2 of products with different

sales terms-d hange in mi2 of customers-e 3mproper sales cutoff -f !nrecorded sales-g ?apping-h 'lower collections caused by tighter economic

conditions or lowering of the /uality of thereceivables.

8-33 a. *ross margin percentage for drug and nondrug sales is as

follows:

,R76 /0/,R76

77&77$77#77

$7.(H$.H$.1H$.#H

#.7H#.7H#1.@H#1.+H

The e2planation given by Adams is correct in part, but appears tobe overstated. The gross margin percentage for nondrugs isappro2imately consistent.


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834$continued%

. 6bsolete or unsalable inventory may be present and mayre/uire markdown to the lower of cost or market.

#. Especially when combined with above, there is a highlikelihood that obsolete or unsalable inventory may bepresent. 3nventory appears to be maintained at a higher levelthan is necessary for the company.

$. ollection of accounts receivable appears to be a problem.Additional provision for uncollectible accounts may benecessary.

&. Especially when combined with $ above, the allowance foruncollectible accounts may be understated.

(. epreciation e2penses may be understated for the year.

b. .*' 14 >ake an estimated calculation of total commissione2pense by multiplying the standard commission rate timescommission sales for each of the last two years. ompare theresulting amount to the commission e2pense for that year.


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8-35

RA.0/'*R

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R*A60/ (0R./*6.7A.0/

/AR* 0(./*6.7A.0/

1. es urrent ratio hasdecreased from previousyear and is significantlylower than the industryaverages. This couldindicate a shortage ofworking capital re/uiredfor competition in thisindustry.

6btain e2planation forthe decrease incurrent ratio andinvestigate the effecton the companyCsability to operate,obtain neededfinancing, and meetthe re/uirements of itsdebt agreements.

. es An 114D#H increase inthe amount of timere/uired to collectreceivables provides lesscash with which to paybills. This change could

represent a change inthe collection policy,which could have asignificant effect on thecompany in the future. 3tmay also indicate that alarger allowance foruncollectible accountsmay be needed ifaccounts receivable areless collectible than in77$.

etermine the causeof the change in thetime to collect andevaluate the long4termeffect on thecompanyCs ability to

collect receivablesand pay its bills. Thedifference betweenthe companyCs andthe industryCs days tocollect could indicatea more strict creditpolicy for thecompany. Theinvestigation of thispossibility couldindicate that thecompany is forfeiting a

large number of salesand lead to arecommendation for amore lenient creditpolicy.

#. es The difference in thecompanyCs days to selland the industry issignificant. This couldindicate that thecompany is operatingwith too low an inventory

level causing stock4outsand customerdissatisfaction. 3n thelong term, this couldhave a significantadverse effect on thecompany.

3nvestigate thereasons for thedifference in the daysto sell between thecompany and theindustry. eterminethe effect on the

company in terms ofcustomerdissatisfaction andlost customers due tostock4outs or longwaits for delivery.

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8-35 $continued%

RA.0/'*R

/**, (0R./*6.7A.0/

R*A60/ (0R./*6.7A.0/

/AR* 0(./*6.7A.0/

$. Go GDA GDA

&. es The industry averageincreased almost 17H

indicating that theindustry is buildinginventories eitherintentionally to fill anincreased demand orunintentionally due todecreased demand andinability to dispose ofinventory -as indicatedfurther by significantdecrease in the industrygross profit percent 4 see+ below.

3nvestigate the marketdemand for the

companyCs product todetermine if asignificant disposalproblem may e2ist.There may be a netrealiable valueproblem due to theseconditions.

(. Go GDA GDA

). Go GDA GDA

+. es The company appears tohave raised prices duringthe past year to achievethe gross profit H of theindustry. =owever, itappears that theindustryCs gross profit Hhas been reduced fromeither increased cost of

goods which could notbe passed on tocustomers in priceincreases or reduction inselling prices fromcompetition, decreaseddemand for product, oroverproduction. Theresult of these changescould be significant tothe companyCs ability toproduce a profit on itsoperations.

etermine the reasonfor the change in theindustryCs gross profitpercent and the effectthis might have on thecompany.

@. Go GDA GDA

c. >ahogany %roducts operations differ significantly from the industry.>ahogany has operated in the past with higher turnover ofinventory and receivables by selling at a lower gross margin andlower operating earnings. =owever, the company has changedsignificantly during the past year. The days to convert inventory to

8-35 $continued%

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cash have increased )H -11 days, while the current ratio hasdecreased by 1&H. The company was able to increase its grossmargin percent during the year when the industry was e2periencinga significant decline in gross margin.

8-3! a. The companyCs financial position is deteriorating significantly.The companyCs ability to pay its bills is marginal -/uick ratio J 7.@)and its ability to generate cash is weak -days to convert inventory to

cash J ((.) in 77& versus 1)#.+ in 771. The earnings pershare figure is misleading because it appears stable while the ratioof net income to common e/uity has been halved in two years. Theaccounts receivable may contain a significant amount ofuncollectible accounts -accounts receivable turnover reduced &Hin four years, and the inventory may have a significant amount ofunsalable goods included therein -inventory turnover reduced $7Hin four years. The companyCs burden for increased inventory andaccounts receivable levels has re/uired additional borrowings. Thecompany may e2perience problems in paying its operating liabilitiesand re/uired debt repayments in the near future.

b.

A,,..0/A./(0R'A.0/ R*A60/ (0R A,,..0/A ./(0R'A.0/

1. ebt repaymentre/uirements, leasepaymentre/uirements, andpreferred dividendre/uirements

. ebt to e/uity ratio

To project the cash re/uirements for the ne2t several yearsin order to estimate the companyCs ability to meet itsobligations.

To see the companyCs capital investment andability of the company to e2ist on its present investment.

#. 3ndustry average ratios To compare the companyCs ratios to those of the averagecompany in its industry to identify possible problem areasin the company.

$. Aging of accounts

receivable, bad debthistory, and analysis ofallowance foruncollectible accounts

To see the collection potential and e2perience in accounts

receivable. To compare the allowance for uncollectibleaccounts to the collection e2perience and determine thereasonableness of the allowance.

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8-3! $continued%

A,,..0/A./(0R'A.0/ R*A60/ (0R A,,..0/A ./(0R'A.0/

&. Aging of inventory andhistory of markdowntaken

To compare the age of the inventory to the markdowne2perience since the turnover has decreased significantly.To evaluate the net realiable value of the inventory.

(. 'hort4 and long4termli/uidity trend ratios

To indicate whether the company may have li/uidityproblems within the ne2t five years.

c. 5ased on the ratios shown, the following aspects of thecompany should receive special emphasis in the audit:

1. Ability of the company to continue to ac/uire inventory,

replace obsolete or worn4out fi2ed assets, and meet its debtobligations based on its current cash position.

. ;easonableness of the allowance for uncollectible accountsbased on the reduction in accounts receivable turnover andincrease in days to collect receivables.

#. ;easonableness of the inventory valuation based on thedecreased inventory turnover and increased days to sellinventory.

$. omputation of the earnings per share figure. 3t appearsinconsistent that earnings per share could remain relativelystable when net earnings divided by common e/uity has

decreased by &7H. This could be due to additional stockofferings during the period, or a stock split.

8-3"

a. The Toys 8;9 !s decision to sell toys and other products through itsBeb site may be related to any of these possible businessstrategies: Matc# Competition. 5ecause other toy retailers may be

offering products through the 3nternet, Toys 8;9 !s may havedecided that it needed to also offer products online to match

their competition and meet consumer e2pectations in themarketplace.

)arget *e" Mar$ets. 5y offering products to consumersthrough its Beb site, Toys 8;9 !s may be able to e2pand itsmarket to consumers in geographic areas not having a Toys8;9 !s retail store. onsumers throughout regions of thecountry and world can now order products without visiting aToys 8;9 !s store.

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8-3" $continued%

En#ance +*e" Economy, Image. >anagement may beusing the offering of products through its Beb site to signalthat Toys 8;9 !s embraces the new e4commerce economyand is a technology leader in the toy retail industry. Theonline sales offering may provide a signal that the companyintends to be a competitive player in both traditional and e4

commerce markets.

b. E2amples of business risks associated with the Toys 8;9 !s decision tooffer online product sales may include the following: Insufficient Capacity to -andle .emand. 3f demand for

products through the Toys 8;9 !s Beb site e2ceedse2pectations, internal systems and personnel may not beable to handle the volume of orders in a timely fashion. Thetime it takes for inventory warehousing and distributionprocesses for online sales may be greater than e2pectedgiven that single orders must be individually handled. 3n

contrast, shipments made to retail outlets are oftenprocessed in bulk.

Inade'uate (ccounting System Interface. The offering ofsales online re/uires the design and implementation of new3nternet4based accounting systems that must capture,process, and record online transactions. Those transactionsmust be integrated with traditional sales transactions into theToys 8;9 !s accounting records and financial statements.Those systems may not be ade/uately designed for timelyand accurate interface.

Consumer Privacy. *iven that online consumers will be

providing confidential personal information, including creditcard data, the Toys 8;9 !s system must be designed toprotect consumer privacy during transmission andprocessing of orders. 5reaches in consumer privacy mayaffect future demand for online sales and may increase legale2posure to the company.

Security. Toys 8;9 !s may be e2posing its internalaccounting and other 3T systems to security breaches.onsumers will be accessing the company Beb site andrelated databases that interface with e2isting internalsystems. Ade/uate protection, such as firewalls, is needed

to protect company systems from infiltration.

c. The decision by Toys 8;9 !s to partner with Amaon.com to handleonline sales may provide these advantages: &in$ /it# Establis#ed E%commerce Participant0

Amaon.com"s core business strategy involves the offeringof products through the 3nternet directly to consumers. As aresult, Amaon.com represents one of the more e2perienced

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8-3" $continued%

market participants in the online sales marketplace.%artnering with Amaon.com allows Toys 8;9 !s to takeadvantage of that e2perience and already establishedsystems, which shortens the learning curve for Toys 8;9 !smanagement.

Capture (ma1on.com Customers. %artnering with

Amaon.com may lead to increased sales opportunities. AsAmaon.com customers visit the Amaon.com Beb site,they may also make decisions to purchase toys and otherproducts from Toys 8;9 !s.

Increase Consumer Confidence in /eb Site Portal. *ivenAmaon.com"s reputation in the e4commerce marketplace,consumers may be more confident transacting business withToys 8;9 !s, given its partnering with Amaon.com.oncerns about consumer privacy may be diminished whencustomers realie that Toys 8;9 !s is offering online salesprocessing through a known, reputable e4commerce vendor.

d. Each of the business risks identified in 8b9 may lead to an increasedrisk of material misstatements in the financial statements, if noteffectively managed. Insufficient Capacity to -andle .emand. 3f demand for

products through the Toys 8;9 !s Beb site e2ceeds thecompany"s ability to process orders in a timely fashion,consumers may cancel earlier recorded orders or re/uestreturns when delivery occurs well beyond the e2pecteddelivery date. The accounting systems must be designed toaccurately reflect cancellations and returns in a timely

fashion consistent with *AA%. Additionally, if the processingof orders is significantly delayed, the accounting systemsmust be ade/uately designed to ensure sales are notrecorded prematurely -e.g., not until delivery.

Inade'uate (ccounting System Interface. 3f the online salessystem interface with the main accounting system isinade/uate, online sales may -1 not be processed, - beprocessed more than once, or -# be processed inaccurately.

Any of these risks could lead to material misstatements inthe financial statements.

Consumer Privacy. 3f consumer privacy is breached, e2isting

sales may be cancelled or returns beyond the normal periodmay be re/uested. 'uch activity would need to be properlyreflected in the financial statements. Additionally, legale2posures may increase, which may re/uire additionalfinancial statement disclosures.

Security. !nauthoried access to other Toys 8;9 !s systemsand databases may introduce unintentional and intentionalmisstatements into the accounting records. 3f unauthoriedaccess is not restricted, material misstatements in financialstatements may result.

+4


23/40


24/40

838$continued%

b. 3n the audit of long4term contracts, it is essential to obtain assurancethat the contract is enforceable so that income can be recogniedon the percentage4of4completion basis. 3t is also important toconsider other aspects of the contract that relate to variousaccounting aspects, such as price and other terms, cancellationprivileges, penalties, and contingencies. 3n this case, 5eale has

concluded that the signed contract, written in c>ullan"s8standard9 contract, based on client representation. 6f course,auditing standards re/uire that management"s representations, aweak form of evidence, be corroborated with other evidence wherepossible. 5eale might argue that the confirmation obtainedconstitutes such evidence.

5eale"s argument may seem logical with regard toenforcement, however, the confirmation form refers to e2istingdisputes. 3t says nothing about contractual clauses that mayforeshadow enforceability.


25/40

8-38 $continued%

3n addition, whenever the field work standards are violatedthere are implied violations of other standards. 3t might be arguedthat 5eale was not proficient as an auditor because of her failureswith the new client acceptance procedures and the >ontrealcontract. 'imilarly, it might be argued that due professional carewas not taken both by 5eale and by 5lack for delegating so much

to 5eale.8-3#

Bhen the computer option is assigned, an E2cel spreadsheet -


26/40

8-3# $continued%

Get incomeDe/uity J -self4e2planatory

Allowance for doubtful accounts D accounts receivable J -selfe2planatory

5ad debtsDsales J bad debts D gross sales

'ales returns and allowancesDsales J sales returns andallowancesDgross sales

. 'et4up. E2cel spreadsheets must be planned in advance.This can be referred to as Oset4up.O A useful techni/ue is to use ablock diagram to plan the set4up. This helps see the overall shapeand content of the spreadsheet and is helpful for guiding its detailedpreparation and how outputs will be controlled and formatted. Ablock diagram for this spreadsheet follows. 3t shows thespreadsheet divided into three sections: the heading, the input

section, where data will be entered, and the results section wherethe ratios will be calculated. A vertical structure is used to facilitateprintouts that will fit in an +41D 2 1$ inch format. The structure could

just as easily be side4by4side.

+4(


27/40

8-3# $continued%

A1

*

A&

*$#

A$)

*)1

#. heck on accuracy of inputs. A major concern is knowingthat input data has been entered accurately. This can usuallybe achieved by two alternative procedures. The first iscomputing totals and comparing them to check figures.


28/40

$. Treatment of negative values. Gegative values can be entered asnegative inputs or positive inputs. 3t is important to respond properlyto the treatment used when the values are included incomputations.

&. heck on accuracy of formulas. 6ne of the biggest problems withusing spreadsheets is errors in the development of formulas. 6neuse of each formula should be done manually to check its

correctness and the formulas should receive a careful second partyreview. 3f this second step is impractical, a second party should atleast review the results for reasonableness.

Templates for the computer solutions prepared using E2celare included on the ompanion Bebsite and on the 3nstructor"s;esource 4;6>, which is available upon re/uest.

6olo)on ros 'anu9acturing CoAnalytical Procedures

alculated from

adjusted year4end balances:*; RA.06 2&&5 2&&4 2&&3 2&&2

Muick

*ross marginDsales

Average inventory turnover

urrent

Average days to collectreceivables

Get incomeDtotal assets

Get incomeDsales

'alesDe/uity

ebtDe/uity

Get incomeDe/uity

Allowance for doubtfulaccountsDaccounts receivable

5ad debtsDsales

'ales returns andallowancesDgross sales

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+4+


29/40

The 'olomon brothers are considering going public to e2pand thebusiness at a time that land and building costs in 5oston are at e2tremelyinflated values. %resently gross profit margins are 1H of sales and netincome is &H of sales. 5oth ratios decreased during the past year. Tofinance e2pansion, additional debt is out of the /uestion because long4term debt is presently e2tremely high -debt to e/uity ratio is $.7.epreciation on new plant and e/uipment at the inflated prices will cause

high depreciation charges, which may significantly reduce the profitmargins.

b. The account that is of the greatest concern is allowance foruncollectible accounts. The following are three key analyticalprocedures indicating a possible misstatement of allowance foruncollectible accounts:

1. rea


30/40

6ales


31/40

8-4& $continued%

Account alance *sti)ate o9 > A)ount o9 Potential 'isstate)ent%roperty ta2es ecrease of F1$7,777 when property increased

5ad debts 'ee re/uirement f for an analysis

epreciation e2pense 3ncrease of F1. million, perhaps partly due to new

building and e/uipment purchases


32/40

8-4& $continued%

f.

*sti)ate o9 Potential nderstate)ent in Allowance

A?R urnover 2&&4 2&&3 2&&2

'ales 1$@,$& 1#),&+7 1&,+1$

Average accounts receivable @,$) ),+++ ),&+

Turnover 1(.1 1).$ 1(.(

,ays 6ales 0utstanding

#(& #(& #(& #(&

Turnover 1(.1 1).$ 1(.(

,ays .( 7.@ .7

Allowance as a Percentage o9 7ross Receivales

Allowance (@@ (@@ (+

*ross ;eceivables 17,#77 +,1@$ ),&+

Percentage (.+H +.&H @.7H

Potential understate)ent in allowance

'uggested percent @.&H Estimate based on decrease in turnover*ross accounts receivable 17,#77

'uggested allowance @)@

Actual Allowance (@@

Potential understate)ent 28&

+4#


33/40

8-4& $continued%

-part of re/uirement c

+4##

Pinnacle Manufacturing Company

Income Statement - All Divisions

For the Year Ended Decemer !"#$$% #$$% #$$! #$$! #$$# #$$#

Dollar &alue ' of Sales Dollar &alue ' of Sales Dollar &alue ' of Sales

Sales 149,424,646 100.00% 137,741,766 100.00% 125,982,294 100.00%

Sales Returns and Allowances 179,470 0.12% 162,102 0.12% 168,022 0.13%

Cost of Sales 104,807,966 70.14% 96,595,908 70.13% 88,685,361 70.40%

!ross "rof#t 44,437,210 29.74% 40,983,756 29.75% 37,128,911 29.47%

(PE)A*I+, EPE+SES-Allocated

Salar#es$ana&e'ent 2,348,025 1.57% 2,190,819 1.59% 1,995,723 1.58%

Salar#es$(ff#ce 324,392 0.22% 272,185 0.20% 266,831 0.21%

)#cens#n& and cert#f#cat#on fees 196,229 0.13% 158,608 0.12% 141,112 0.11%

Secur#t* 566,716 0.38% 584,936 0.42% 548,133 0.44%

+nsurance 95,924 0.06% 95,268 0.07% 94,340 0.07%

ed#cal enef#ts 24,415 0.02% 27,021 0.02% 25,052 0.02%

Ad-ert#s#n& 167,268 0.11% 163,311 0.12% 144,068 0.11%

us#ness /ul#cat#ons 7,194 0.00% 5,096 0.00% 673 0.00%

"ro/ert* taes 23,246 0.02% 163,311 0.12% 152,776 0.12%

ad dets 866,330 0.58% 948,679 0.69% 862,690 0.68%

e/rec#at#on e/ense 5,492,959 3.68% 4,258,699 3.09% 3,797,885 3.01%

Account#n& fees 281,973 0.19% 273,190 0.20% 260,684 0.21%

otal o/erat#n& e/enses$Allocated 10,394,671 6.96% 9,141,123 6.64% 8,289,967 6.56%

(PE)A*I+, EPE+SES-Direct

Salar#es$Sales 15,408,771 10.31% 14,062,181 10.21% 12,960,341 10.29%

a&es Rental 506,186 0.34% 546,228 0.40% 500,630 0.40%

a&es$ecan#cs 1,146,126 0.77% 1,229,015 0.89% 1,159,488 0.92%

a&es$areouse 5,034,197 3.37% 4,899,331 3.56% 4,759,347 3.78%

!ara&e collect#on 28,458 0.02% 27,313 0.02% 33,017 0.03%

"a*roll enef#ts 2,735,670 1.83% 2,695,165 1.96% 2,516,783 2.00%

Rent$ areouse 826,350 0.55% 701,235 0.51% 659,430 0.52%

ele/one 33,350 0.02% 41,443 0.03% 50,319 0.04%t#l#t#es 270,072 0.18% 244,959 0.18% 238,578 0.19%

"osta&e 92,390 0.06% 122,494 0.09% 131,546 0.10%

)#nen ser-#ce 17,788 0.01% 11,330 0.01% 13,985 0.01%

Re/a#rs and 'a#ntenance 171,872 0.12% 154,500 0.11% 154,968 0.12%

Clean#n& ser-#ce 92,428 0.06% 74,852 0.05% 67,903 0.05%

)e&al ser-#ce 407,605 0.27% 174,807 0.13% 132,381 0.11%

uel 294,933 0.20% 313,020 0.23% 243,054 0.19%

ra-el and enterta#n'ent 106,415 0.07% 95,268 0.07% 87,373 0.07%

"ens#on e/ense 235,244 0.16% 217,752 0.16% 110,444 0.09%

(ff#ce su//l#es 154,213 0.10% 136,092 0.10% 148,790 0.12%

#scellaneous 308,969 0.21% 97,185 0.07% 125,228 0.10%

otal o/erat#n& e/enses$#rect 27,871,037 18.65% 25,844,170 18.78% 24,093,605 19.13%

otal (/erat#n& /enses 38,265,708 25.61% 34,985,293 25.42% 32,383,572 25.69%

(/erat#n& +nco'e 6,171,502 4.13% 5,998,463 4.33% 4,745,339 3.78%(ter /ense$+nterest 1,897,346 1.27% 2,128,905 1.55% 2,085,177 1.66%

+nco'e efore aes 4,274,156 2.86% 3,869,558 2.78% 2,660,162 2.12%

ederal +nco'e aes 1,013,745 0.68% 1,399,001 1.02% 1,166,553 0.93%

+et Income !.#/$.%"" 2.18% #.%0$.110 1.76% ".%2!./$2 1.19%

eta#ls of 'anufactur#n& e/enses are not #ncluded #n t#s scedule.


34/40

8-4& $continued%

-part of re/uirement d

+4#$


Income Statement - 3elurn Division

For the Year Ended Decemer !"#$$% #$$% #$$! #$$! #$$# #$$#

Dollar &alue ' of Div4 Sales Dollar &alue ' of Div4 Sales Dollar &alue ' of Div4 Sales

Sales 121,371,795 100.00% 111,877,873 100.00% 102,308,887 100.00%

Sales Returns and Allowances 126,522 0.10% 113,483 0.10% 117,627 0.11%

Cost of Sales 86,671,580 71.41% 79,914,454 71.43% 73,370,003 71.71%

!ross "rof#t 34,573,693 28.49% 31,849,936 28.47% 28,821,257 28.18%


Salar#es$ana&e'ent 1,905,965 1.57% 1,774,466 1.59% 1,616,447 1.58%

Salar#es$(ff#ce 263,320 0.22% 220,457 0.20% 216,121 0.21%


Secur#t* 460,017 0.38% 473,767 0.42% 443,958 0.43%

+nsurance 77,861 0.06% 77,159 0.07% 76,407 0.07%

ed#cal enef#ts 19,956 0.02% 22,048 0.02% 20,441 0.02%

Ad-ert#s#n& 135,777 0.11% 132,276 0.12% 116,690 0.11%us#ness /ul#cat#ons 4,336 0.00% 2,735 0.00% 361 0.00%

"ro/ert* taes 18,396 0.02% 132,276 0.12% 123,743 0.12%

ad dets 708,015 0.58% 762,910 0.68% 693,759 0.68%

e/rec#at#on e/ense 4,329,633 3.57% 3,449,347 3.08% 3,076,109 3.01%

Account#n& fees 230,075 0.19% 220,363 0.20% 210,276 0.21%



Salar#es$Sales 12,947,327 10.67% 11,646,277 10.41% 10,733,735 10.49%

a&es Rental $ $ $

a&es$ecan#cs $ $ $

a&es$areouse 4,124,063 3.40% 3,968,235 3.55% 3,854,855 3.77%

!ara&e collect#on $ $ $

"a*roll enef#ts 2,099,069 1.73% 2,182,959 1.95% 2,038,477 1.99%

Rent$ areouse 690,375 0.57% 571,916 0.51% 537,821 0.53%

ele/one 26,659 0.02% 33,069 0.03% 40,152 0.04%t#l#t#es 200,398 0.17% 198,409 0.18% 193,240 0.19%

"osta&e 80,204 0.07% 99,207 0.09% 106,538 0.10%

)#nen ser-#ce 14,539 0.01% 9,642 0.01% 11,900 0.01%


Clean#n& ser-#ce 67,780 0.06% 60,628 0.05% 55,000 0.05%

)e&al ser-#ce 119,122 0.10% 120,490 0.11% 91,247 0.09%

uel 224,342 0.18% 253,526 0.23% 196,858 0.19%


"ens#on e/ense 193,389 0.16% 176,367 0.16% 89,454 0.09%

(ff#ce su//l#es 125,176 0.10% 110,228 0.10% 120,513 0.12%

#scellaneous 58,819 0.05% 53,130 0.05% 68,461 0.07%


otal o/erat#n& e/enses 29,478,336 24.30% 27,053,997 24.20% 25,015,686 24.45%

(PE)A*I+, I+C(ME 5,095,357 4.19% 4,795,939 4.27% 3,805,571 3.73%



35/40

8-4& $continued%


+4#&


Income Statement - Solar-Electro Division

For the Year Ended Decemer !"

#$$% #$$% #$$! #$$! #$$# #$$#


Sales 22,381,936 100.00% 20,073,876 100.00% 18,373,763 100.00%

Sales Returns and Allowances 43,430 0.19% 35,208 0.18% 36,494 0.20%Cost of Sales 16,311,635 72.88% 14,687,724 73.17% 13,484,900 73.39%

!ross "rof#t 6,026,871 26.93% 5,350,944 26.65% 4,852,369 26.41%


Salar#es$ana&e'ent 347,907 1.55% 323,147 1.61% 294,370 1.60%

Salar#es$(ff#ce 48,064 0.21% 40,146 0.20% 39,356 0.21%


Secur#t* 83,967 0.38% 86,281 0.43% 80,853 0.44%

+nsurance 14,212 0.06% 14,054 0.07% 13,917 0.08%

ed#cal enef#ts 3,641 0.02% 4,015 0.02% 3,722 0.02%

Ad-ert#s#n& 24,783 0.11% 24,087 0.12% 21,249 0.12%

us#ness /ul#cat#ons 900 0.00% 497 0.00% 66 0.00%

"ro/ert* taes 3,360 0.02% 24,087 0.12% 22,533 0.12%

ad dets 124,019 0.55% 144,706 0.72% 131,590 0.72%

e/rec#at#on e/ense 915,513 4.09% 628,135 3.13% 560,167 3.05%Account#n& fees 40,824 0.18% 40,999 0.20% 39,122 0.21%



Salar#es$Sales 2,256,643 10.08% 2,204,049 10.98% 2,031,351 11.06%

a&es Rental $ $ $

a&es$ecan#cs $ $ $

a&es$areouse 716,283 3.20% 722,659 3.60% 702,011 3.82%

!ara&e collect#on $ $ $

"a*roll enef#ts 492,677 2.20% 397,542 1.98% 371,231 2.02%

Rent$ areouse 107,026 0.48% 100,370 0.50% 94,386 0.51%

ele/one 4,868 0.02% 6,025 0.03% 7,315 0.04%

t#l#t#es 54,837 0.25% 36,131 0.18% 35,190 0.19%

"osta&e 7,340 0.03% 18,069 0.09% 19,404 0.11%

)#nen ser-#ce 2,653 0.01% 1,367 0.01% 1,688 0.01%Re/a#rs and 'a#ntenance 35,120 0.16% 36,131 0.18% 36,241 0.20%

Clean#n& ser-#ce 21,300 0.10% 11,039 0.05% 10,014 0.05%

)e&al ser-#ce 276,825 1.24% 42,156 0.21% 31,925 0.17%

uel 55,555 0.25% 46,171 0.23% 35,851 0.20%


"ens#on e/ense 35,301 0.16% 31,182 0.16% 15,815 0.09%

(ff#ce su//l#es 22,849 0.10% 20,073 0.10% 21,946 0.12%

#scellaneous 241,764 1.08% 39,433 0.20% 50,811 0.28%



(PE)A*I+, I+C(ME 50,043 0.23% 280,314 1.39% 154,878 0.83%



36/40

8-4& $continued%


+4#(


Income Statement - Machine-*ech Division

For the Year Ended Decemer !"

#$$% #$$% #$$! #$$! #$$# #$$#


Sales 5,670,915 100.00% 5,790,017 100.00% 5,299,644 100.00%

Sales Returns and Allowances 9,518 0.17% 13,411 0.23% 13,901 0.26%Cost of Sales 1,824,751 32.18% 1,993,730 34.43% 1,830,458 34.54%

!ross "rof#t 3,836,646 67.65% 3,782,876 65.34% 3,455,285 65.20%


Salar#es$ana&e'ent 94,153 1.66% 93,206 1.61% 84,906 1.60%

Salar#es$(ff#ce 13,008 0.23% 11,582 0.20% 11,354 0.21%


Secur#t* 22,732 0.40% 24,888 0.43% 23,322 0.44%

+nsurance 3,851 0.07% 4,055 0.07% 4,016 0.08%

ed#cal enef#ts 818 0.01% 958 0.02% 889 0.02%

Ad-ert#s#n& 6,708 0.12% 6,948 0.12% 6,129 0.12%

us#ness /ul#cat#ons 1,958 0.03% 1,864 0.03% 246 0.00%

"ro/ert* taes 1,490 0.03% 6,948 0.12% 6,500 0.12%

ad dets 34,296 0.60% 41,063 0.71% 37,341 0.70%

e/rec#at#on e/ense 247,813 4.37% 181,217 3.13% 161,609 3.05%

Account#n& fees 11,074 0.20% 11,828 0.20% 11,286 0.21%otal o/erat#n& e/enses$Allocated 470,216 8.29% 412,022 7.11% 372,033 7.01%


Salar#es$Sales 204,801 3.61% 211,855 3.66% 195,255 3.68%

a&es Rental 506,186 8.93% 546,228 9.43% 500,630 9.45%

a&es$ecan#cs 1,146,126 20.21% 1,229,015 21.23% 1,159,488 21.88%

a&es$areouse 193,851 3.42% 208,437 3.60% 202,481 3.82%

!ara&e collect#on 28,458 0.50% 27,313 0.47% 33,017 0.62%

"a*roll enef#ts 143,924 2.54% 114,664 1.98% 107,075 2.02%

Rent$ areouse 28,949 0.51% 28,949 0.50% 27,223 0.51%

ele/one 1,823 0.03% 2,349 0.04% 2,852 0.05%

t#l#t#es 14,837 0.26% 10,419 0.18% 10,148 0.19%

"osta&e 4,846 0.09% 5,218 0.09% 5,604 0.11%

)#nen ser-#ce 596 0.01% 321 0.01% 397 0.01%


Clean#n& ser-#ce 3,348 0.06% 3,185 0.06% 2,889 0.05%)e&al ser-#ce 11,658 0.21% 12,161 0.21% 9,209 0.17%

uel 15,036 0.27% 13,323 0.23% 10,345 0.20%


"ens#on e/ense 6,554 0.12% 10,203 0.18% 5,175 0.10%

(ff#ce su//l#es 6,188 0.11% 5,791 0.10% 6,331 0.12%

#scellaneous 8,386 0.15% 4,622 0.08% 5,956 0.11%



(PE)A*I+, I+C(ME 1,026,102 18.07% 922,210 15.93% 784,890 14.83%



37/40

.nternet Prole) 6olution .ndustry Research and Client Acceptance

8-1 The vignette at the beginning of hapter ( in the te2t contains a briefdescription of the PPPP 5est fraud. 6ne area where the auditors were particularlycriticied in that audit had to do with the auditorsC lack of industry knowledge.Bith hindsight it appeared that the fraud should have been easily detectedbecause PPPP 5ests" large restoration contracts were in e2cess of F) million

while the largest restoration jobs on record in the insurance restoration industrywere less than F# million.

ou have been approached by 6n the 'unny 'ide, a team sports uniformdesigner and manufacturer for women, about performing the company"s financialstatement audit. The company began operations eight years ago and hase2perienced strong growth in the last several years. Teri Qloth, the chiefe2ecutive officer, has told you that her company e2pects production in 77$ to be$&7,777 units. 'he also provided summary historical financial and operating dataregarding unit sales. 3n 77 and 77#, the company reported sales of #(&,777and $7,777 units, respectively.

Are 6n the 'unny 'ide"s 77 and 77# unit sales reasonableL Bhy or

why notL -=int: Risit the !.'. ensus 5ureauCs Beb site Swww.census.gov. 6nceyou are at the site, go to the 85usiness9 section and then to the 8>anufacturing9sector4specific data section. 6nce you are there, locate the urrent 3ndustrial;eports. Ge2t search the 3;s by 'ubject Title for Apparel. ata about women"steam sports uniforms can be found by search for 8Apparel.9 !se the most currentannual report for your analysis.

AnswerThe 77 and 77# sales do not appear reasonable. The !.'. ensus5ureau reports that annual shipments of women"s team sports uniforms were asfollows:

771 4 not disclosed 77 4 ()(,777 units shipped

Muarterly shipments, in units, for 77 were as follows:

1st #1,777nd 1#,777#rd 11,777$th 71,777

These data suggest that it is unlikely that 6n the 'unny 'ide shipped more than

&7H of all uniforms during 77.

>ore information can be found in the !.'. ensus 5ureau"s report on (pparel67887 Swww.census.govDindustryD1Dm/#1&a7&.pdf.

+4#)


38/40

.nternet Prole) 6olution 0tain Client acanagement"s iscussion and Analysis as well as theuch of the information has been taken from the company"s Bebsite Swww.target.com and its 174Q filing for the year ended innesota. This was the first retail store tooffer well4known national brands at discounted prices. 3n the 1@)7s,Target paved new ground by implementing electronic cash registersstorewide to monitor inventory and speed up guest service. Thecompany also began hosting an annual shopping event for seniors andpeople with disabilities, plus a toy safety campaign. 3n the 1@+7s,

Target rolled out electronic scanning nationwide.


39/40

8-2 $continued%

.escription of t#e company9s business4 The company operates 1,1$)Target stores in $) states, ($ >ervyn"s and ($ >arshall art, Balgreens and local department, specialty, off4price, discount and drug store chains, independent retail stores and3nternet and catalog businesses that handle similar lines ofmerchandise. The company also competes with other companies fornew store sites. The company believes the principal methods ofcompeting in its industry include brand recognition, customer service,store location, differentiated offerings, value, /uality, fashion, price,advertising, depth of selection and credit availability. Target is a leaderin community involvement programs and believes that it is in a strongcompetitive position with regard to these competitive factors.

:ey accounting issues4 The following is a list of accounting issuesidentified after reviewing Target"s annual report. 'tudent responsesmay vary.

;elated parties 4 The company is comprised of three operating

segments: Target, >ervyn"s and >arshall arshall


40/40

8-2 $continued%

?eases 4 The company leases a number of their retail buildings.

The company utilies both operating and capital leasingarrangements. The present value of operating and capitalleases for the ne2t & years total F@$ and F1$$ million,respectively.

*ecessary experience levels4 'tudent responses will vary, however,students should recognie that an audit team is comprised of auditorswith varying levels of e2perience and backgrounds. 3t is e/uallyimportant that students recognie the need for auditors with industrye2perience.

-/ote: 3nternet problems address current issues using 3nternet sources. 5ecause3nternet sites are subject to change, 3nternet problems and solutions may change.urrent information on 3nternet problems is available at www.prenhall.comDarens.
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Audit Palnning and Analitycal Procedures.doc

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