Question
Background Information SHR Corporation (SHR) is a midsize, publicly traded direct marketer and retailer of outdoor sporting goods based in the United States. Its common
Background Information SHR Corporation (SHR) is a midsize, publicly traded direct marketer and retailer of outdoor sporting goods based in the United States. Its common stock is listed on the New York Stock Exchange under the symbol SHR. The company prides itself on selling high-quality outdoor sporting goods at competitive prices and providing outstanding customer service. SHR directly markets its merchandise through two major channelsits catalogs and its websiteto customers in the United States and nearly 100 other countries. It currently has retail stores and distribution centers in the United States, Canada, and Europe. SHR Corporation recently purchased MVF Company, a manufacturer of high-quality outdoor sportswear. SHR also purchases merchandise from highly reputable vendors in the United States and several other countries. SHR Corporation has enjoyed several consecutive years of sustained growth as reflected in the selected financial information, expressed in millions of dollars (US), presented below:
CASE STUDIES Case Study 1: Auditing Entity-Level Controls 2017 2016 2015 Total Assets $700.5 $546.5 $491.3 Sales Revenue 763.5 665.7 589.8 Operating Income 57.5 45.0 38.9 Net Income 34.3 29.0 26.0 Senior management is continuing its efforts to grow the company, increase its market share, and enhance shareholder value by:
Further expanding its direct sales globally. Systematically increasing the number of retail stores. Selectively acquiring other businesses that are aligned with its core competencies. Increasing competition over the past several years has motivated management to continuously pursue new and innovative ways to differentiate SHRs products, streamline the companys business processes, and take full advantage of advances in IT. Operating efficiency is a critical component of SHRs competitive pricing strategy. The risks that concern senior management the most heading into fiscal 2018 include: The continuing economic uncertainty further decreases discretionary consumer spending, which in turn will adversely affect the companys sales and profitability. Mounting competition in the industry may make it increasingly difficult to differentiate the companys high-quality merchandise at prices consumers are willing to pay. 2 Deterioration of the companys brand or its positive image in the marketplace may adversely affect sales and profitability. Failure to successfully integrate newly acquired businesses may adversely affect the companys performance. The inability to generate operating efficiencies and leverage IT may adversely affect the companys profits. Placing too much emphasis on operating efficiencies may adversely affect product quality and customer service. During the first six months of 2018, SHR has experienced slower sales growth and higher operating expenses than anticipated. There is growing concern that forecasted performance targets for the year will not be achieved.
Scenario 1: Ethical Behavior is Good Business The concept that ethical behavior is good business is integral to SHRs strategy. For example, the companys 2017 annual report includes this statement: Sound ethical conduct is a key component of how we do business and continues to contribute significantly to the companys success.
Requirements of CASE STUDIES Case Study 1: Part A - Auditing Entity-Level Controls Remember the following definitions as you complete the requirements under Scenario 1 Activities 1 below:
Business Objective: To demonstrate sound ethical conduct in everything we do.
Business Risk: Disregard for sound ethical principles, either intentional or unintentional, may cause managers and employees to cut corners, embellish performance results, misuse company resources, or otherwise act in a manner that harms the company and its stakeholders.
Use the business objective and business risk stated above as the basis for answering the following questions. As he or she deems necessary Scenario 1 Activities 1. Management asserts that entity-level controls are designed adequately and operating effectively to reduce the above stated risk to an acceptably low level.
Identify the key entity-level controls you expect to find in place if managements assertion is true. Keep in mind that entity-level controls may exist in any of the five COSO components of internal control (control environment, risk assessment, controls, information and communication, and monitoring). Many elements of the control environment are soft in nature. They may, for example, involve senior management behavior that intrinsically leaves little, if any, audit trail. An example of a soft control that you may have included in your answer to question 1 above is expressed as follows: Senior management fosters a strong corporate ethical climate by what they say and what they do. They lead by example when faced with tough business decisions involving ethical ramifications.
Requirements of Part A: 1. Identify the audit procedures you would use to determine whether this control exists and are operating effectively within SHR Corporation. Describe the evidence you might find that would indicate operating effectively (be specific). Keep in mind that you need to build a sufficient body of appropriate evidence to support a valid conclusion.
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