Case Study of
Just For Foot Inc.
Q1. Prepare common-sized balance linens and cash flow statements and compute crucial ratios intended for 1997-1998. What were the high-risk financial statement items for the 1998 audit?
* Common-sized financial claims:
* Crucial ratio analysis:
Liquidity and solvency: | 1999| 1998| 1997
Current ratio| several. 387 | 1 . 998 | installment payments on your 142
Debt to equity| 1 . 117 | 0. 672 | zero. 720
Times interest earned| 6. 376 | 24. 665 | twenty eight. 286
Activity| гЂЂ| гЂЂ| гЂЂ
AR turnover| 44. 641 | 40. 749 | 39. 127
Products on hand turnover| 1 ) 493 | 1 . 649 | 1 ) 107
Profitability ratios| | | гЂЂ
Functioning margin| 6. 61%| six. 17%| 8. 12%
Net margin| three or more. 44%| four. 47%| a few. 43%
Go back on assets| 3. 87%| 4. 77%| 3. 70%
Return in equity| eight. 18%| several. 98%| 6. 37%
In line with the data calculated above, Just For Feet did relatively well at liquidity since the current proportion and debts to fairness were a lot like companies inside the same sector. Besides, JFF had a typical AR yield rate as others in the retail businesses, and the working margin and net perimeter also viewed fine. Nevertheless turn to inventory turnover level, the number was quite terrible for a retail company. Beat average range of the market which is about 2 . 8-3. 2, JFF's faced a significant difficulty in inventory turnover, which generated a potential risk in making profit. Likewise the come back on assets and value were below the competitors on the market, and the period interest earned declined very fast during 1996-1998, means that the standard of financing activities was poor.
* High-risk financial assertion items:
For 1998 audit, there were a lot of factors ought to be carefully concerned. The initial was the number of inventory. JFF's inventory over 10 years ago consisting over fifty percent of the industry’s total resources, which was a top risk aspect and need more efforts in physical affirmation and value. The second audit red flag was the negative earnings. The common income for a full company ought to be positive and this is especially the case for those significant, well established types. So JFF's situation achieved it stand out in the industry, and the examine process ought to focus on this abnormal truth. Moreover, the dramatic raises in debt as well as the rising of accounts payable should also be regarded as and need extra review attention.
Q2. Identify internal control hazards common to significant, high-volume retail. How ought to these hazards affect the review planning decisions for these kinds of a client?
Most of the time, the most conceivable internal control risk to large, high-volume retail stores is the fact about products on hand. How to count it and value it accurately is always the issue that auditors will need to concern the majority of. The review team will need to examine you’re able to send period physical count records and conduct year-end inventory count independently to ensure the precision of products on hand number. Likewise, another very important risk place that auditors should pay attention to is the cash accounts. The audit methods designed to analyze whether the financial figures are fairly explained should conform to adapt to the specific company bottom on it is overall organization environment and operating qualities.
In addition , selling companies often adopt price leadership technique which minimizes operating expenditures. This will cause inconsistency in policies due to decentralization and high employer turnover price because of low human resource price, and both these factors can accordingly increase risk of accounting errors or perhaps frauds. To be able to issue view properly for the retail business, auditors should certainly plan ideal audit test focus on these kinds of high risk areas.
Q3. Identify inherent risk factors popular among businesses facing such competitive conditions. How should these kinds of risks impact the audit planning decisions intended for such a customer?
Intensively competitive business environment will increase the management's pressure and thus boost the inherent review risk of the organization. In...