8e Ch4 Mini Case Und Entity

EarthWear Hands-on Mini-case Chapter 4 - Understanding the Entity and Its Environment © The McGraw-Hill Companies, Inc, !"#!

In this mini-case yo% will complete the &%estionnaire 'or %nderstanding Earth(ear Earth(ear Clothiers, Inc and the environment in which it operates

INSTRUCTIONS:

1

The wor)sheet titled *+%estionnaire* contains a partially completed copy o' the &%estionnaire can thro%gh the &%estions and responses that have already een completed

2

.o% are to complete &%estions #, !, /, 0, 1, #2, #1, #3, and 4" e'er to the in'ormation on the Earth(ear Investor and (illis 5 6dams C76s C76s wesites 8wwwmhhecom9messier:e; 8wwwmhhecom9messier:e; and the ac)gro%nd doc%ment elow to complete the &%estions .o% can also leverage the wor) o' the prior year a%dit team shown in Es maBor so%rces o' reven%e, incl%ding the nat%re Hi$h-6a%it) c%othin$ !or otdoor s'orts, sch as hi.in$, s.iin$, !%)o' its prod%cts and9or services? !ishin$, and *hite-*ater .a)a.in$ O&er the )ears, the Co#'an)s 'rodct %ines ha&e $ro*n to inc%de casa% c%othin$, accessories, shoes and so!t %$$a$e

#"9!19!"#4

An) Re#ainin$ Ris. No

(ho are the entity>s )ey c%stomers?

The co#'an) has a #ai%in$ %ist *hich consists o! a''ro;i#ate%) 211 No 'eo'%e Ho*e&er, a''ro;i#ate%) 7 #i%%ion are &ie*ed as csto#ers (ecase the) #ade at %east one 'rchase !ro# the co#'an) *ithin the %ast 2 #onths Additiona%%), a sr&e) condcted () the Co#'an) in the United States drin$ 21 indicated that a''ro;i#ate%) < o! its csto#ers *ere in the 3- a$e $ro' and had #edian inco#es o! =78,

(ho are the entity>s )ey s%ppliers?

A%% $oods are ' rodced () inde'endent #an!actrers e;ce't !or #ost o! its so!t %$$a$e, *hich is asse#(%ed at the Co#'an)s !aci%ities "rin$ 211, the Co#'an) 'rchased #erchandise !ro# a''ro;i#ate%) 3 do#estic and !orei$n #an!actrers One #an!actrer and one inter#ediar) acconted !or a(ot 1-29< o! the Co#'an)s recei&ed #erchandise, res'ecti&e%), in 211 In 211 a(ot 8< o ! the Co#'an)s #erchandise *as i#'orted, #ain%) !ro# Asia, Centra% A#erica, and Me;ico

+es, the co#'an) *o%d (e s(>ect to a n#(er o! ris.s /or e;a#'%e, i! these !orei$n contries nder$o econo#ic hardshi's or sto' s''%)in$ to the Co#'an), the Co#'an) *o%d need to !ind a%ternati&e s''%iers Additiona%%),  *or.ers (oth do#estica%%) and internationa%%) co%d nder$o a stri.e, ths sto''in$ shi'#ent o! s''%ies /rther#ore, the &a%e o! !orei$n crrenc) co%d a''reciate re%ati&e to the US "o%%ar, *hich  *o%d #a.e s''%ies #ore cost%)

(hat is the entity>s organi@ational str%ct%re?

The company has a well-developed organi@ational str%ct%re with clear lines o' a%thority among the vario%s operating departments and sta'' '%nctions The organi@ational str%ct%re is appropriate 'or Earth(ear>s activities

Ao

(here are its maBor locations?

Doise, Idaho is the main corporate location Earth(ear also has phone and Ao Aone o' these co%ntry locations distri%tion centers in the United ingdom, Germany, and Fapan pose threats to Earth(ear as a res%lt o' es internal control system

Ao

22

23

27

Ao

Ao

28

Has management estalished and maintained internal control that .es  will, among other things, initiate, record, process, and report transactions consistent with management assertions in the 'inancial statements?

29

Has management een responsive to prior recommendations 'rom its a%ditors?

Ao

Management has always een responsive to o%r recommendations on internal control

Inte$rit) and ethica% &a%es: Have appropriate entity policies regarding s%ch matters as .es acceptale %siness practices, con'licts o' interest, and codes o' cond%ct een estalished and are they ade&%ately comm%nicated?

Ao

31

oes management demonstrate the appropriate tone at the top, incl%ding es oBectives are congr%ent with other maBor sta)eholders 8eg, investors and creditors;?

Ao

 4

oes an a%dit committee es e research and earnings

A

7

.

Na#e: C%ass: A Qestionnaire !or "oc#entin$ the Understandin$ o! EarthWear C%othiers and its En&iron#ent C%ient Na#e: EarthWear C%othiers Entit) and En&iron#ent Cate$or): Natre o! the Entit) +ear ended: "ece#(er 31, 212 Qestion

 1

Co#'%eted (): Re&ie*ed (): "ate:

Ris. /actors "escri'tion0Res'onse (hat are the entity>s maBor so%rces o' reven%e, incl%ding the nat%re Hi$h-6a%it) c%othin$ !or otdoor s'orts, sch as hi.in$, s.iin$, !%)o' its prod%cts and9or services? !ishin$, and *hite-*ater .a)a.in$ O&er the )ears, the Co#'an)s 'rodct %ines ha&e $ro*n to inc%de casa% c%othin$, accessories, shoes and so!t %$$a$e

Please Complete #"9!19!"#4

An) Re#ainin$ Ris. No

(ho are the entity>s )ey c%stomers?

The co#'an) has a #ai%in$ %ist *hich consists o! a''ro;i#ate%) 211 No 'eo'%e Ho*e&er, a''ro;i#ate%) 7 #i%%ion are &ie*ed as csto#ers (ecase the) #ade at %east one 'rchase !ro# the co#'an) *ithin the %ast 2 #onths Additiona%%), a sr&e) condcted () the Co#'an) in the United States drin$ 21 indicated that a''ro;i#ate%) < o! its csto#ers *ere in the 3- a$e $ro' and had #edian inco#es o! =78,

(ho are the entity>s )ey s%ppliers?

A%% $oods are 'rodced () inde'endent #an!actrers e;ce't !or #ost o! its so!t %$$a$e, *hich is asse#(%ed at the Co#'an)s !aci%ities "rin$ 211, the Co#'an) 'rchased #erchandise !ro# a''ro;i#ate%) 3 do#estic and !orei$n #an!actrers One #an!actrer and one inter#ediar) acconted !or a(ot 1-29< o! the Co#'an)s recei&ed #erchandise, res'ecti&e%), in 211 In 211 a(ot 8< o! the Co#'an)s #erchandise *as i#'orted, #ain%) !ro# Asia, Centra% A#erica, and Me;ico

+es, the co#'an) *o%d (e s(>ect to a n#(er o! ris.s /or e;a#'%e, i! these !orei$n contries nder$o econo#ic hardshi's or sto' s''%)in$ to the Co#'an), the Co#'an) *o%d need to !ind a%ternati&e s''%iers Additiona%%),  *or.ers (oth do#estica%%) and internationa%%) co%d nder$o a stri.e, ths sto''in$ shi'#ent o! s''%ies /rther#ore, the &a%e o! !orei$n crrenc) co%d a''reciate re%ati&e to the US "o%%ar, *hich  *o%d #a.e s''%ies #ore cost%)

(hat are the entity>s maBor assets?

In&entor) and 5ro'ert), '%ant, and e6i'#ent

No

(hat are the entity>s maBor liailities?

The co#'an) has no %on$ ter# de(t, (t the) do ha&e an nsecred do#estic %ine o! credit sed to !inance 'rchases

No

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 3

 4

 7

 1

oes the competitive ind%stry environment present any ris)s 'or the The Co#'an)s 'rinci'a% co#'etitors are retai% stores, inc%din$ entity? Identi'y any competitors s'ecia%t) sho's, de'art#ent stores, and other cata%o$ co#'anies "irect co#'etitors inc%de Eddie ?aer, @ands End, @@ ?ean, 5ata$onia, and Ti#(er%and The a''are% retai% (siness in $enera% is intense%) co#'etiti&e o c%stomer dynamics present any ris)s 'or the entity?

No, the co#'an) has a s!!icient n#(er o! 'eo'%e on their #ai%in$ %ist 211 #i%%ionB and a s!!icient n#(er o! csto#ers *ho ha&e #ade 'rchases in the %ast 2 #onths

o technological 'actors present any ris)s 'or the entity?

+es Tho$h the co#'an) s*itched to a ne* s)ste#, it !aced si$ni!icant No, 'ro(%e#s *ith the s)ste# *ere 'ro(%e#s in the third and !orth 6arters o! 21 These 'ro(%e#s %ar$er%) reso%&ed !or the #ost 'art co%d contine or arise a$ain a!ter 21

Is there high t%rnover o' senior management, co%nsel, or oard memers?

No Unti% /e(rar) 212, *hen EarthWears Chie! Accontin$ O!!icer, ?rad Norton ne;'ected%) %e!t the co#'an) to ta.e another >o( Ho*e&er, 'rior to that, the co#'an)s e;ecti&e tea# had (een the sa#e !or  )ears

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+es, the co#'an) #a) a%so !ace increased co#'etition !ro# other retai%ers as the n#(er o! te%e&ision sho''in$ channe%s and the &ariet) o! #erchandise o!!ered o&er the internet increase No

+es There has (een #ch s'ec%ation o! Caro% Mca)s 6a%i!ications () EarthWear e;ecti&es