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Audit: Case study 1.2 JUST FOR FEET, Inc.


Based on Case Study1.2 Just for Feet, Inc. Contemporary Auditing Real Issues and Cases 7th ed. Michael Knapp

1) Prepare common-sized balance sheets and income statements for Just for Feet for the period 1996-1998. Also compute key liquidity, solvency, activity, and profitability ratios for 1997-1998. Given these data, comment on what you believe were the high-risk financial statement items for the 1998 Just for Feet audit.

2) Just for Feet operated large, high-volume retail stores. Identify internal control risks common to such businesses. How should these risks affect the audit planning decisions for such a client?

3) Just for feet operated in an extremely competitive industry, or sub industry. Identify inherent risk factors common to businesses facing such competitive conditions. How should these risks affect the audit planning decisions for such a client?

4) Prepare a comprehensive list, in a bullet format, of the audit risk factors present for the 1998 Just for Feet audit. Identify the 5 audit risk factors that you believe were the most critical to the successful completion of that audit. Rank these risk factors from least to most important and be prepared to defend your rankings. Briefly explain whether or not you believe that the Deloitte auditors responded appropriately to the five critical audit risk factors that you identified.

5) Put yourself in the position of Thomas Shine in this case. How would you have responded when Don-Allen Ruttenberg asked you to send a false confirmation to Deloitte & Touche? Before responding, identify the parties who will be affected by your decision.


Solution Preview

See attached Excel file.

1. Common sized financials and ratios are in Excel (attached). The biggest thing that sticks out to me is the inventory turnover. I compared Just For Feet, Inc. to Shoe Carnival for the 1999 year (Shoe Carnival 1999 year ends on Jan 30, 2010).

Return on assets and return on equity were also below competitors in the industry. Also, inventory is such a large proportion of total assets (over half) so it should get a lot of attention and work.

I believe that the negative cash flow from operations should be an audit flag. Typically a large chain would generate positive cash flow. This cash flow looks more like a start up than a large established retail chain.

The dramatic increases in debt and the rising of AP would also catch my attention and warrant extra audit attention.

2. Inventory controls are a large issue in large high-volume retail stores, particularly counting and valuing it. The large high-volume stores also tend to have a high volume of cash ...

Solution Summary

Your tutorial is 636 words and includes a list of ten audit risk factors and discussion about features of large retail chains that increase audit risk. A set of common sized financial statements and ratio computations are provided in Excel. A comparison is made to Shoe Carnival for the 1999 year to get a feel for the competitor's financial positions in the same time period.