Feet case study Essay
Feet case study
The item that seemed to really call my attention as being a problem is some of the profitability ratios. Starting with the Gross Profit margin, it seems at the moment that Just Feet makes $41.62 in 1999 and in 1998 $41.53 in profit, but it cost the company more to produce than what they are making in profit. This shows that they need to lower their costs in making their product to be more profitable. The company has not even reached a breakeven point. We also see that in the two years of 1998 to 1999 that there was a decrease in profitability a decrease in return of equity. This means that the company is making less profit for each dollar that the shareholders have invested in the company. This ratio shows us how efficiently the company is working, and it shows how efficiently management is using the funds that shareholders have contributed to the company. So in doing these analysis for Just for Feet Inc. I would be questioning the efficiency of management for handling the income that shareholders have contributed. I would also want to look for closely at how the company is producing, the cost they are having is higher than the profit, for that reason we would want to evaluate how they could lower cost to make the profit more profitable for the company. Question 2.
Just for Feet operated large, high-volume retail stores. Identify internal control risks common to such a business. How should these risks affect the audit planning decisions for such a client? One of the risks that a large retail store like Just for Feet Inc. could find in internal controls is in the area of Inventory Control. The largest concern is that what is stated on the Financial statements really exist. It is important to evaluate this risk so that a company can see if there is any thievery by employees and to make sure that on its balance sheet it shows an accurate report of inventory. Another area of risk in a high volume retail store would be the issue of handling cash.
Since there is such a high turnover of cash in a large retail store, there needs to be good internal controls in place that will prevent false accounts receivable, and a misrepresentation of revenues. Another risk that needs to be evaluated is the management operations and how they handle and divide responsibilities within the location. In retail stores there can be a high turnover of people, for that reason management needs to make sure that there are always the proper division of duties, they need to make sure all paperwork is properly recorded and accounted for. As to how it will affect the audit plan, the auditor needs to make sure that there is proper division of duties, needs to test to make sure values are correct and there are no misstatements. The need to look closely at the inventory, accounting for the proper value on hand as well as the proper items in stock. Question 3
Just for feet operated in an extremely competitive industry, or sub-industry. Identify inherent risk factors common to businesses facing such competitive conditions. How should these risks affect the audit planning decisions for such a client? An inherent risk is when a company is susceptible to a misstatement in financial statements. It is the responsibility of an auditor to carry out audits that will make these risks low to nonexistent. An example of this is segregation of duty. IN a highly competitive business profit and larger revenue will identify you as being the best, a possible risk is the lack of personnel that keeps expenses low giving people double duties, but creating an inherent risk. If we do not have management signing off on purchase orders, and others account for the product being received and another accounting for it being sold and another confirming the completion of the process in the accounting of such items through monthly closings or such. An auditor would want to evaluate that management has the experience necessary to carry out these plans. And those that are in the mentioned positions also would be experienced. If there is a high turnover in these positions it could be a sign of fraudulent behavior because people who are trust worthy would not stay in a place to do something dishonest. All these type of changes should be evaluated by the auditor. Question 4
Prepare a comprehensive list, in a bullet format of the audit risk factors present for the 1998 Just for Feet audit. Identify the five audit risk factors that you believe were most critical to the successful completion of that audit. Rank these risk factors from least to most important and be prepared to defend your rankings. Briefly explain whether or not you believe that the Deloitte auditors responded appropriately to the five critical audit risk factors that you identified.
The emphasis that management made on reaching the earnings goals at whatever cost. The near year end transactions that Just for Feet was engaged in The law cash resources of the company
The type of business strategy that the management of Just for Feet used The way that the company always kept the stock prices on the high end The increase in inventory at the end of both years.
The vendor confirmations not coming through to confirm transaction by Just for Feet.
The risk factors that were most significant to the audits completion would be the Inherent Risk, control risk, audit risk and detection risk. An Audit risk is when an auditor answers the following questions: Is there a risk of fraud? Is this risk related to the complexity of transactions? Does it include and significant transaction out of the normal course of business? Karl M Johnston, (Auditing 2014) states that “whether the risk is related to recent significant economic accounting, or other developments and, it requires specific attention.” In my ranking of more important to least important in risk factors I think that they are generally all equally important. Inherent risk are important because it will evaluate if there has been some type of theft, or if there was anything changed in the form of a non-routine transactions or a complex transaction.
Sort of like what Just for Feet did when raised the inventory at the end of two years. The Control risk is also of equal importance because it is relates to a misstatement being stopped with internal controls in place. The fact that Just for Feet was allowing misstatements to be written by outside vendors to send to the auditor shows that the lack of internal controls within the Just for Feet entity allowed this type of poor fraudulent management to occur. This would be assessed through assertion level checks like: Valuation, existence, presentation, completeness and rights and obligations disclosures. In my opinion Deloitte did not respond appropriately to these risk factors. Though they may have seen the risk factors, though they saw the misstatements and questioned them, they did not act accordingly. If they had the SEC would not have fined them. Question 5
Put yourself in the position of Thomas Shine in this case. How would you have responded when Don-Allen Ruttenberg asked you to send a false confirmation to Deloitte & Touche? Before responding, identify the parties who will be affected by your decision?
The people who would have been affected by my decision is the shareholders, others who worked for the company, the public, management and executives of the company, even those who were customers of Just for Feet. But even then with all those people at risk I would have said no and risked losing my job by being fired. My ethical position to adhere to what is right is what would require me to make this decision. To be asked to do something fraudulent would make me want to separate myself from this type of management. At the end I would pay the price for my bad choice.
http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/return-equity-roe-916 retrieved 10/2/14
http://www.dummies.com/how-to/content/how-to-assess-inventory-management-control-risk.html retrieved 10/3/14
http://accounting-simplified.com/audit/introduction/audit-assertions.html retrieved 10/5/14