2 Just For Feet Case Analysis Rewrite 30534

ACCT 3596: Auditing

Just For FEET, Inc. Case Analysis: Case 1.2 #1-3, 5 Beka Vinogradov Seat #1

2011

1 Beka Vinogradov ACCT 3596: Case Analysis

#1. Common-Sized Balance Sheets.

1996

Just for FEET, Inc. Balance Sheet Years ending Jan 31st 1997

1998

36.93% 9.04% 1.74% 35.47% 0.56% 83.75% 14.61%

18.40% 0.00% 3.53% 45.97% 1.50% 69.40% 21.08%

1.80% 0.00% 2.74% 58.01% 2.65% 65.20% 23.29%

0.00%

8.05%

10.31%

1.64% 100.00%

1.46% 100.00%

1.19% 100.00%

26.61% 10.35% 1.46% 0.11%

20.22% 11.41% 2.07% 0.30%

0.00% 14.55% 3.60% 0.13%

0.56%

0.72%

0.96%

39.09% 2.76% 41.85%

34.73% 5.48% 40.21%

19.25% 33.51% 52.75%

0.00% 50.69% 7.47%

0.00% 48.76% 11.03%

0.00% 36.20% 11.04%

58.15%

59.79%

47.25%

100.00%

100.00%

100.00%

Current Assets: Cash & Equivalents Marketable Securities AFS s Receivable Inventory Other Current Assets Total Current Assets Property & Equipment, net Goodwill, net Other Total Assets Current Liabilities: Short-Term Borrowings s Payable Accrued Expenses Income Taxes Payable Current Maturities of LT Debt Total Current Liabilities LT Debt & Obligations Total Liabilities Shareholders' Equity: Common Stock Paid-In Capital Retained Earnings Total Shareholders' Equity Total Liabilities & SH' Equity

2 Beka Vinogradov ACCT 3596: Case Analysis

#1. Common-Sized Income Statements.

1996 100.00%

Just for FEET, Inc. Income Statement Years ending Jan 31st 1997 100.00%

1998 100.00%

57.54%

58.46%

58.38%

Gross Profit

42.46% 0.23%

41.54% 0.23%

41.62% 0.17%

Store Operating Store Opening Costs Amortization of Intangibles General & istrative Total Operating Expenses Operating Income

27.04% 4.38%

29.18% 1.41%

30.01% 1.76%

0.07%

0.25%

0.27%

3.07%

3.77%

3.14%

34.57%

34.60%

35.18%

8.12%

7.17%

6.61%

Interest Expense Interest Income EBIT & ∆ Acct. Principle

-0.32% 1.85% 9.65%

-0.30% 0.29% 7.15%

-1.04% 0.02% 5.59%

Provision for Income Taxes Earnings prior to ∆ Acct. Principle

3.43% 6.22%

2.68% 4.47%

2.15% 3.44%

Prior Year ∆ Acct. Principle Net Earnings

-0.80% 5.43%

0.00% 4.47%

0.00% 3.44%

Net Sales Cost of Sales Other Revenues Operating Expenses:

3 Beka Vinogradov ACCT 3596: Case Analysis

#1. Key liquidity, solvency, activity, and profitability ratios (1997, 1998). 1997

1998

$ 172,746 $ 146,914 1.1758308 $ 179,299 $ 146,914 1.2204351 $ 314,743 $ 146,914 2.1423622

$ 82,490 $ 155,706 0.5297805 $ 98,330 $ 155,706 0.6315107 $ 311,167 $ 155,706 1.9984265

$ 256,397 $ 6,553 39.12666 365 39.12666

$ 478,638 $ 15,840 30.217045 365 30.217045

A/R Turnover

9.3286778

12.079275

Days to Collect Receivables

$ 147,526 $ 133,323 1.1065308 365 1.1065308 329.85979

$ 279,816 $ 206,128 1.3574866 365 1.3574866 268.87926

$ 157,278 $ 218,556 0.7196233 $ 20,825 $ (832) -25.030048

$ 180,268 $ 268,084 0.672431 $ 34,296 $ (1,446) -23.717842

Cash Ratio

Quick Ratio

Current Ratio

Inventory Turnover

Days to Sell Inventory

Debt to Equity

Times Interest Earned

4 Beka Vinogradov ACCT 3596: Case Analysis

$

13,919 ?

$

21,403 ?

$ 37

EPS $ 108,871 $ 256,397 0.4246189 $ 20,825 $ 256,397 0.0812217 $ 24,743 $ 375,834 0.0658349 $ 24,743 $ 218,556

$ 198,822 $ 478,638 0.4153912 $ 34,296 $ 478,638 0.0716533 $ 34,220 $ 448,352 0.076324 $ 34,220 $ 268,084

0.1132113

0.1276466

Gross Profit %

Profit Margin

Return on Assets

Return on Common Equity

#1. High-risk financial statement items. Based on the information given in the case and the data calculated (above), there are multiple high-risk financial statement items for the 1998 audit of Just for FEET, specifically regarding balances and presentations and disclosures. Notably, inventory valuation, which increased from 35.47% of total assets in 1996 to 58.01% in 1998, and the accuracy and allocation of vendor allowances were marked as the highest risk areas. With FEET's use of creative ing, accuracy and classification of transactions/events must be monitored as well. While the calculation of store opening costs fluctuated, store operating costs saw a gross increase - from $69,329 in 1996 to $232,505 in 1998.

5 Beka Vinogradov ACCT 3596: Case Analysis

#2. Internal Control Risks; audit planning decisions. Some internal control risks common among large, high-volume retail stores include dealing with inherent limitations and potential fraud. Even if a well-designed internal control system is in place, the employees using it are ultimately the deciding factors in its effectiveness. For example, management may instruct an employee or easily-influenced executive (of another company) to alter information or confirmations or multiple employees may conspire to steal assets or misstate records (collusion; misappropriation of assets).

#3. Inherent Risk Factors; audit planning decisions. Businesses that face extreme competition are susceptible to many inherent risk factors – the measurement of the auditor’s assessment of the likelihood that there are material misstatements in an balance before considering the effectiveness of internal control. Complex valuation issues and related party transactions are two such factors that would affect audit planning decisions. Valuation issues may lead the audit team to request more evidence, if they choose to accept the audit at all. Risks such as inventory turnover leading to potential misstatements of inventory, costs of goods sold, or obsolescence of inventory may influence the audit firm’s decision to hire outside specialists to assist in the audit. Another inherent risk factor, client business risk (competitive advantage), would further emphasize the need to understand the client’s industry in the audit planning process.

6 Beka Vinogradov ACCT 3596: Case Analysis

#5. Affected parties; how would you have responded? There are many parties involved which would be affected by the decision. Both Thomas Shine and Reebok, Just for FEET executives and employees, Deloitte & Touche, as well as all public shareholders/investors would have been affected by Just for FEET’s decision to commit fraud. With complying executives of vendor firms, these agents are further susceptible to the negative repercussions of Just for FEET’s fraudulent behavior. I would have said “no” to Don-Allen Ruttenberg if asked to send a false confirmation. Illegality aside, I would be risking my reputation, five years in federal prison, and a $250,000 fine to do so. Furthermore, I feel Shine’s actions did absolutely nothing to benefit himself or his company. There was no gain to Shine or Reebok in consenting with Ruttenberg’s request so I have trouble understanding why he agreed to it. The case states that FEET had a “significant amount of economic leverage” over the vendor executives, but doesn’t really explain why. This is a prime example of why fraud occurs (see: fraud triangle): the “pressures” (on Shine) to consent to FEET’s demands, as well as the “opportunities” available and “attitudes/rationalization” of top management/Ruttenberg to commit.