ACCOUNTING - AUDITING

Asher Farms Inc. Understanding of Client's Business Environment

INTRODUCTION Asher Farms, Inc. is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. Asher Farms sells ice pack, chill pack and frozen chicken, in whole, cut-up and boneless form to retailers, distributors, and casual dining operators principally in the southeastern and southwestern United States. During its fiscal year ended October 31, 2011 the company processed 343.6 million chickens, or approximately 2.0 billion dressed pounds. According to 2011 industry statistics, Asher Farms is the 4th largest processor of dressed chickens in the United States based on estimated average weekly processing. Asher Farms' common stock is traded on the NASDAQ national market with an aggregate market value of $677 million on October 31, 2011 Asher Farms' chicken operations presently encompass 7 hatcheries, 6 feed mills and 8 processing plants employing 1,059 salaried and 8,646 hourly employees. The company has contracts with operators of approximately 530 broiler farms that provide the company with sufficient housing capacity for its current operations. Asher Farms also has contracts with 173 breeder farm operators and 44 pullet farm operators. INFORMATION ABOUT THE AUDIT Asher Farms is required to have an integrated audit of its consolidated financial statements and its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Your firm, Smith and Jones, PA., recently accepted Asher Farms as an audit client and as a staff auditor you have been asked to obtain some preliminary information about the poultry industry to provide a basis for understanding the client's business environment. Background information about the poultry industry from Smith and Jones' industry database is provided for your review. Smith and Jones, PA. Background Information: Poultry Industry Consumption Over the past decade, both the mix of meat products, which includes beef, pork, chicken, and fish related products, and actual levels of per capita consumption within many nations has changed dramatically. Improved technologies and infrastructure development has expanded production and trade in meat products. At the same time, changing lifestyles, incomes, and a growing awareness of health issues related to meat consumption altered the patterns of meat demand worldwide. The large increase in meat consumption has been largely met by the worldwide growth in intensive livestock production, particularly poultry. This is expected to continue as real income grows in the emerging economies around the world. The U.S. poultry industry is the world's largest producer and second largest exporter of poultry. U.S. consumption of poultry (broilers, other chicken, and turkey) is the fastest growing segment of all meats. Per capita consumption of meats in the United States from 1988 to 2008 is presented in Figure 1 (Source: U.S. Department of Agriculture). Figure 1: US Beef, Pork, Chicken and Fish Consumption 100.0 90.0 80.0 70.0 60.0 Pounds per Capita 400 30.0 20.0 20.0 10.0 0.0 1988 1989 + 1990 + 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ---Beef -- Pork Chicken - Fish&Shellfish With about 15 percent of total poultry production being exported, the U.S. poultry industry is heavily influenced by currency fluctuations, trade negotiations, and economic growth in its major importing markets. Production U.S. broiler chicken production is concentrated in a group of States stretching from Delaware, south along the Atlantic coast to Georgia, then westward through Alabama, Mississippi, and Arkansas. The top broiler- producing State is Georgia, followed by Arkansas, Alabama, Mississippi, and North Carolina. The poultry production industry faces issues common to most businesses, as well as issues that are unique to agriculture and the production of animal-based food products. There are seven stages involved in getting chicken meat to the consumer: Breeder flock Pullet farm Breeder farm Hatchery Broiler farm Processing Distribution There are seven stages involved in getting chicken meat to the consumer: Breeder flock Pullet farm Breeder farm Hatchery Broiler farm Processing Distribution The production of broiler chickens for meat consumption begins with the grandparent breeder flocks. Breeder flock operators specialize in producing the generations of male and female strains that generate the parents that make the broiler chicken. The breeder flocks are raised to maturity in grandparent growing and laying farms where fertile eggs are produced. The fertile eggs are incubated at the grandparent hatchery to produce pullets. Pullets are young female breeder chickens that produce fertile hatching eggs that become broilers for the market. The pullets are sent to breeder farms to produce eggs. The eggs from the pullet breeder farms are sent to hatcheries for incubation. Hatched chicks are sent from the hatcheries to broiler farms. At the broiler farms the chicks are raised until they have reached the desired processing weight. Adult broiler chickens are caught and hauled to processing plants once they reach the desired processing weight at the broiler farms The finished products are sent to distribution centers and then transported to customers. REQUIRED [1] A useful approach for understanding a client's business environment and associated business risks is to perform a PESTLE analysis. PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors that are used to asses the client's business environment. A PESTLE analysis focuses on factors that may affect an entity's business model, but are beyond the control or influence of the client. While beyond management's direct influence, such factors may significantly impact an entity's business risk. Read the background information about the poultry industry and conduct additional research on the internet to obtain the latest news and information on the industry. Brainstorm political, economic, social, technological, legal and environmental factors that could affect Asher Farms' business risk. Unless your instructor indicates otherwise, identify at least one business risk factor for each component of the PESTLE acronym. [2] For each of the business risk factors identified in question 1 above, indicate how each risk factor might impact the risk of material misstatements in specific financial statement accounts or disclosures. [3] Professional auditing standards provide guidance on the auditor's consideration of an entity's business environment and associated business risks. (a) What is the auditor's objective for understanding an entity's business environment? (b) Why does an auditor not have responsibility to identify or assess all business risks? (c) Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit. (d) Provide some additional examples of business risks that might not lead to a risk of material misstatement in the financial statements. INTRODUCTION Asher Farms, Inc. is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. Asher Farms sells ice pack, chill pack and frozen chicken, in whole, cut-up and boneless form to retailers, distributors, and casual dining operators principally in the southeastern and southwestern United States. During its fiscal year ended October 31, 2011 the company processed 343.6 million chickens, or approximately 2.0 billion dressed pounds. According to 2011 industry statistics, Asher Farms is the 4th largest processor of dressed chickens in the United States based on estimated average weekly processing. Asher Farms' common stock is traded on the NASDAQ national market with an aggregate market value of $677 million on October 31, 2011 Asher Farms' chicken operations presently encompass 7 hatcheries, 6 feed mills and 8 processing plants employing 1,059 salaried and 8,646 hourly employees. The company has contracts with operators of approximately 530 broiler farms that provide the company with sufficient housing capacity for its current operations. Asher Farms also has contracts with 173 breeder farm operators and 44 pullet farm operators. INFORMATION ABOUT THE AUDIT Asher Farms is required to have an integrated audit of its consolidated financial statements and its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Your firm, Smith and Jones, PA., recently accepted Asher Farms as an audit client and as a staff auditor you have been asked to obtain some preliminary information about the poultry industry to provide a basis for understanding the client's business environment. Background information about the poultry industry from Smith and Jones' industry database is provided for your review. Smith and Jones, PA. Background Information: Poultry Industry Consumption Over the past decade, both the mix of meat products, which includes beef, pork, chicken, and fish related products, and actual levels of per capita consumption within many nations has changed dramatically. Improved technologies and infrastructure development has expanded production and trade in meat products. At the same time, changing lifestyles, incomes, and a growing awareness of health issues related to meat consumption altered the patterns of meat demand worldwide. The large increase in meat consumption has been largely met by the worldwide growth in intensive livestock production, particularly poultry. This is expected to continue as real income grows in the emerging economies around the world. The U.S. poultry industry is the world's largest producer and second largest exporter of poultry. U.S. consumption of poultry (broilers, other chicken, and turkey) is the fastest growing segment of all meats. Per capita consumption of meats in the United States from 1988 to 2008 is presented in Figure 1 (Source: U.S. Department of Agriculture). Figure 1: US Beef, Pork, Chicken and Fish Consumption 100.0 90.0 80.0 70.0 60.0 Pounds per Capita 400 30.0 20.0 20.0 10.0 0.0 1988 1989 + 1990 + 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ---Beef -- Pork Chicken - Fish&Shellfish With about 15 percent of total poultry production being exported, the U.S. poultry industry is heavily influenced by currency fluctuations, trade negotiations, and economic growth in its major importing markets. Production U.S. broiler chicken production is concentrated in a group of States stretching from Delaware, south along the Atlantic coast to Georgia, then westward through Alabama, Mississippi, and Arkansas. The top broiler- producing State is Georgia, followed by Arkansas, Alabama, Mississippi, and North Carolina. The poultry production industry faces issues common to most businesses, as well as issues that are unique to agriculture and the production of animal-based food products. There are seven stages involved in getting chicken meat to the consumer: Breeder flock Pullet farm Breeder farm Hatchery Broiler farm Processing Distribution There are seven stages involved in getting chicken meat to the consumer: Breeder flock Pullet farm Breeder farm Hatchery Broiler farm Processing Distribution The production of broiler chickens for meat consumption begins with the grandparent breeder flocks. Breeder flock operators specialize in producing the generations of male and female strains that generate the parents that make the broiler chicken. The breeder flocks are raised to maturity in grandparent growing and laying farms where fertile eggs are produced. The fertile eggs are incubated at the grandparent hatchery to produce pullets. Pullets are young female breeder chickens that produce fertile hatching eggs that become broilers for the market. The pullets are sent to breeder farms to produce eggs. The eggs from the pullet breeder farms are sent to hatcheries for incubation. Hatched chicks are sent from the hatcheries to broiler farms. At the broiler farms the chicks are raised until they have reached the desired processing weight. Adult broiler chickens are caught and hauled to processing plants once they reach the desired processing weight at the broiler farms The finished products are sent to distribution centers and then transported to customers. REQUIRED [1] A useful approach for understanding a client's business environment and associated business risks is to perform a PESTLE analysis. PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors that are used to asses the client's business environment. A PESTLE analysis focuses on factors that may affect an entity's business model, but are beyond the control or influence of the client. While beyond management's direct influence, such factors may significantly impact an entity's business risk. Read the background information about the poultry industry and conduct additional research on the internet to obtain the latest news and information on the industry. Brainstorm political, economic, social, technological, legal and environmental factors that could affect Asher Farms' business risk. Unless your instructor indicates otherwise, identify at least one business risk factor for each component of the PESTLE acronym. [2] For each of the business risk factors identified in question 1 above, indicate how each risk factor might impact the risk of material misstatements in specific financial statement accounts or disclosures. [3] Professional auditing standards provide guidance on the auditor's consideration of an entity's business environment and associated business risks. (a) What is the auditor's objective for understanding an entity's business environment? (b) Why does an auditor not have responsibility to identify or assess all business risks? (c) Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit. (d) Provide some additional examples of business risks that might not lead to a risk of material misstatement in the financial statements