American Eagle Outfitters Audit Report

1203 Words May 16th, 2011 5 Pages
Project Phase I American Eagle Outfitters, Inc. (AEO) By: David Jones

I. Business Description Founded in 1977, American Eagle Outfitters (NYSE: AEO) is a retailer that designs and develops fashionable girls’ and boys’ apparel and accessories. The company’s target audience is boys and girls between the ages of 15 and 25 years old. The target audience seeks trendy and fashionable apparel product that meets a high standard of quality at an affordable price point. As of the most recent fiscal year, ended January 30, 2010, American Eagle held 1,103 retail stores in total, operating under the “American Eagle”, “Aerie”, and “Martin+Osa” brand names respectively. In addition to the retail stores,
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Accounts – Greatest Risk of Material Misstatement

The account with the greatest risk of material misstatement is the inventory account. Two other accounts that have risk, but do not have as much risk as the inventory account are: accounts receivable and the property and equipment account. Finally, another account that should be monitored is the short-term investments account.

The inventory account has the greatest risk due to the numerous business and economic factors the affect AEO’s industry. As a specialty retailer, AEO must continue to maintain it’s competitive advantage in terms of forecasting customer trend preferences or risk producing out of date product styles that will lead to excess inventory.

Also, due to the requirement that AEO must enter in to production agreements with suppliers far in advance in order to guarantee inventory, they are even more exposed to fluctuations in consumer preference or economic changes such as a drop in consumer confidence or discretionary spending. AEO appears to typically have an inventory turnover ratio of approximately 6, which is lower than the industry average of 10. This means that AEO on average takes longer to sell its inventory and means that they must forecast demand effectively or risk excess inventory. In terms of a material misstatement, it is imperative that
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