Just for Feet

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Case Study of Just For Feet Inc. Xuan Zhang Q1. Prepare common-sized balance sheets and income statements and compute key ratios for 1997-1998. What were the high-risk financial statement items for the 1998 audit? * Common-sized financial statements: * Key ratio analysis: Liquidity and solvency: | 1999 | 1998 | 1997 | Current ratio | 3.387 | 1.998 | 2.142 | Debt to equity | 1.117 | 0.672 | 0.720 | Times interest earned | 6.376 | 24.665 | 28.286 | Activity | | | | AR turnover | 44.641 | 42.749 | 39.127 | Inventory turnover | 1.493 | 1.649 | 1.107 | Profitability ratios | | | | Operating margin | 6.61% | 7.17% | 8.12% | Net margin | 3.44% | 4.47% | 5.43% | Return on assets | 3.87%…show more content…
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 “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

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