Toy Central Case

2375 Words May 21st, 2014 10 Pages
ISSUES IN ACCOUNTING EDUCATION
Vol. 23, No. 2 May 2008 pp. 299–307

Assessing Audit and Business Risks at Toy Central Corporation

Christine E. Earley and Fred Phillips

INTRODUCTION
[pic]s a senior in a professional services firm, you have been assigned to plan the financial statement audit of a private company named Toy Central Corporation (TCC). In addition, the partner on the engagement has asked you to identify business risks that could adversely affect TCC’s sustained profitability, so that they can be brought to the attention of the company’s board of directors. These tasks will require you to draw on your knowledge of supply chain management, marketing, internal controls, audit assertions, and financial accounting.
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As a private company, TCC is not directly affected by the Sarbanes-Oxley Act (SOX). However, the partner in charge of the engagement has advised you that, ever since the financial scandals at the turn of the century, TCC has become interested in strengthening its corporate governance. Two years ago, following the release of the AICPA’s Audit Committees Toolkit for public and private corporations, TCC has asked your firm to consider not only financial reporting issues, but also significant business risks that could affect the sustainability of TCC’s success in the toy industry. Although TCC’s board of directors believes it is aware of strategic issues facing the company, it has been considering spinning off its digital toy division into a separate company and, subsequently, merging it with an upstart software company. Before embarking on a change in organizational structure, the board wants a ‘‘second set of eyes’’ to ensure it has considered all significant business risks that currently exist and could adversely affect TCC in the foreseeable future. TCC’s audit committee is meeting in two weeks and would like the partner to explain significant business risks identified during KDOK’s interim audit tests and the year-end audit planning.

The partner would like you to prepare an audit planning memorandum that

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