Just for Feet free essay sample

But turn to inventory turnover rate, the number was quite terrible for a retail company. Compare to average number of the industry which is around 2. 8-3. 2, JFF’s faced a serious difficulty on inventory turnover, which led to a potential risk in generating profit. Also the return on assets and equity were below the competitors in the market, and the time interest earned declined very fast during 1996-1998, means that the quality of financing activities was poor. * High-risk financial statement items: For 1998 audit, there were several factors should be carefully concerned. The first was the number of inventory. JFF’s inventory in 1998 consisting more than half of the company’s total assets, which was a high risk factor and need more efforts on physical confirmation and valuation. The second audit red flag was the negative cash flow. The common cash flow for a retail company should be positive and this is especially true for those large, well established ones. We will write a custom essay sample on Just for Feet or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page So JFF’s situation made it stand out in the industry, and the audit process should focus on this abnormal fact. Moreover, the dramatic increases in debt and the rising of accounts payable should also be considered and require extra audit attention. Q2. Identify internal control risks common to large, high-volume retail. How should these risks affect the audit planning decisions for such a client? Generally speaking, the most possible internal control risk to large, high-volume retail stores is that about inventory. How to count it and value it accurately is always the issue that auditors should concern most. The audit team should examine the company’s period physical count records and perform year-end inventory count by themselves to ensure the accuracy of inventory number. Also, another very important risk area that auditors should pay attention to is the cash accounts. The audit procedures designed to examine whether the financial figures are fairly stated should adjust to adapt to the specific company base on its overall business environment and operating characteristics. In addition, retail companies always adopt cost leadership strategy which minimizes operating expenses. This will result in inconsistency in policies because of decentralization and high employer turnover rate because of low human resource expense, and both these factors will accordingly increase risk of accounting errors or frauds. In order to issue opinion properly for a retail company, auditors should plan appropriate audit test focus on these high risk areas. Q3. Identify inherent risk factors common to businesses facing such competitive conditions. How should these risks affect the audit planning decisions for such a client? Intensively competitive business environment will increase the management’s pressure and thus increase the inherent audit risk of the company. In order to satisfy shareholders or investors, management maybe commit fraudulent financial reporting to cover the company’s worsened operation conditions. In this situation, audit planning should have certain procedures to test the opportunities whether management can commit fraud, such as inquiries of management and employers to establish an overall understanding of the client’s strategies and business, industry and economic environment and competitors’ situations. Also another risk factor that will increase the company’s inherent audit risk is the situation of its cash flow. If a retail company has a negative cash flow which means it not generating enough cash to maintain its operations, the risk of misstatement will accordingly increase. As stated in Q1, auditors should spend more efforts on examine the cash accounts if the cash flow of the company shows some abnormal signals. Q4. Identify the audit risk factors present for the 1998 audit. Rank 5 factors that were the most critical to the successful completion of that audit. Did Deloitte auditors responded appropriately to these factors? * Management pressure under highly competitive business environment. * Large inventory size (more than half of total assets) and low inventory turnover(less than half of the industry average). * Unusual financial reporting â€Å"treatments† such as vendor allowances and income control. * Continuing negative cash flow. * Drastic increase in overall debt during the past three years. * Decentralized business. * Low return on assets and equity. The audit risk factors stated above are in my opinion in descending order of importance to the 1998 audit of JFF. First, the management tone is always the critical aspect whether a company will or will not commit a fraudulent financial reporting. If the management is under high pressure in a highly competitive market at the same time has the opportunities to access inappropriate behaviors, it will result in high possibilities that this company conduct intentional misstatement or omission of adequate disclosure in financial statements. And in the JFF case, the unusual facts such as the low inventory turnover and continuing negative cash flow and dramatic increase in debt are also the areas should be pay enough attention to complete a successful audit. Always these unusual facts will increase the difficulties of the company’s operation sustainability, thus let to high risk of accounting fraud activities happening. To some extent, Deloitte auditors did try to complete professional audit for JFF and adopt several tests to finish this process properly, but on the other hand, they failed to respond enough to the dwindling cash and increased debt. They also failed to discover the fact that JFF’s business consistently grow despite of continuing negative operating cash flows in more than three years. These are all the unusual facts for a well-established and high profit retail company. So in my opinion, Deloitte auditors failed to respond appropriately to all possible audit risk factors, and thus led to their failure in the audit process of JFF. Q5. How would you have responded when being asked to send a false confirmation to Deloitte Touche? Before responding, identify the parties who will be affected by your decision. Commonly, all the parties that involved in the company’s business will be affected by booth income if it is false stated. Actually, this is an intentional manipulation of financial statement which will not be accepted under GAAP and related law. Shareholders, investors, vendors and suppliers, customers and company’s employees all will be affected if this false booth income was stated and thus led to certain punishment or penalty on JFF and ultimately caused the company went out of business. If I was in the position of Thomas Shine in this case, I would say no to Don-Allen Ruttenberg. This is simply because as an auditor, I should preform professionally and comply with AICPA Code of professional conduct. It is not allowed to make false financial statement confirmation when I was clearly know what is happening. This may cause some trouble to my career in the short term like I might lose this client or so, but I believe doing the right thing will ultimately benefit me in the long term career development.