Chapter 04 Mini-Case Understanding the Entity and Its Environment

In this mini-case you will complete the questionnaire for understanding EarthWear Clothiers, Incorporated and the environment in which it operates.

INSTRUCTIONS:

Please download the files below to complete the audit tasks associated with this mini-case. The Excel workbook contains the instructions and workpapers you are to complete.

12e_Ch4_Mini_case_Und_Entity

Earthwear Background_Ch.4

EarthWear Annual Report

Exhibit 4-3

Using your completed Excel file, answer the questions presented below.

Please Note:

While the content of this document is very similar to information found on the EarthWear and Willis & Adams, CPAs websites, it contains specific content related to the 2022 audit. This information is applicable to all EarthWear Mini-cases.

Background of EarthWear

EarthWear Clothiers was founded in Boise, Idaho, by James Williams and Calvin Rogers in 1973 to make high-quality clothing for outdoor sports, such as hiking, skiing, fly-fishing, and whitewater kayaking. Over the years, the company's product lines have grown to include casual clothing, accessories, shoes, and soft luggage. EarthWear offers its products through three retailing options: catalogs, retail outlets, and its website.

When EarthWear founders, Williams and Rogers, decided to incorporate their company in 1975, they searched for an accounting firm to conduct the companys approaching year-end audit. They were referred to a bright, young auditor that had recently started his own CPA firm, Michael Willis. Williams and Rogers were immediately impressed with Mr. Willis, and agreed to have Willis and Company complete EarthWears upcoming audit.Ever since, EarthWear and Willis and Adams have had a strong relationship. EarthWear decided to go public in 1986. Although Willis and Adams audited very few other public companies at that time, EarthWear retained Willis and Adams as the companys auditor.

Outdoor Clothing Industry

Over the past several years, the outdoor clothing industry has been growing at a steady, moderate pace. The industry consists of a wide variety of manufacturers that sell products directly to customers or through retail stores, including department stores, specialty shops, and catalog companies. The industry is highly competitive. EarthWears direct competitors include Eddie Bauer, Lands End, L. L. Bean, Patagonia, and Timberland. EarthWear competes primarily on merchandise value (quality and price), its established customer list, and customer service, including fast order fulfillment and unqualified guarantees.

Management

In late February of 2022, EarthWears chief accounting officer/controller Brad Norton unexpectedly left the company to take a job with another clothes manufacturer.Mr. Norton had been with the company since 2012. In those ten years, the auditors from Willis and Adams had enjoyed their work association with Mr. Norton. They found him to be a strong leader with a great deal of personal character. Mr. Norton cited personal reasons for his sudden departure from the company. A new controller, Carol McKay, was selected in November. Before her promotion, Ms. McKay had been the VP of External Reporting.In her 14 years with EarthWear, Ms. McKay spent the majority of her time in External Reporting. As a result, some executives questioned if Ms. McKay had the broad skill-set needed for such a demanding position. After interacting with her during some recent meetings, even some of Willis and Adams professionals questioned Ms. McKays qualifications for the job.

Accounting and Control Systems

With the complexity of EarthWears customer database reaching 21.1 million people, and sales occurring through catalogs, retail outlets, and the internet, the company realized in early 2017 that it was in need of a new, upgraded accounting information system. The company switched to a new, integrated central accounting system in early 2018. The transition to the new system was overseen and implemented by the former controller, Brad Norton. This new system maintains integrated inventory, accounts receivable, payroll, and general ledger software modules. Although the implementation of the new system was expensive and laden with problems, by the 3rd and 4th quarters of 2018 the problems were largely resolved and the company began to see the benefits. The new system integrates the companys operations and accounting systems and allows EarthWears sales force to promise next day delivery to telephone and internet customers. As a result, customer satisfaction has increased.

A Partlal Questionnalre for Documenting the Understanding of EartwWear Clothlets and its Environment CUIENT NAME: EARTHWEAR CLOTHIERS Entity and Environment Category: Nature of the Entity Year ended December 31, 2021 Prok Fockars What are the entitys major. sources of revenue. inckueing the neture of its products andior services? Who are the entity's key customers? Who are the entry's key supplers? What is the entity: organitational structure? Where ale its major locationa? What are the entitys major assets? What are the entity's major lasities? What are the entitys finarkia characteristics including financing sources and current and proapective financial condilion? Are there any poterkial related parties? Are there any neviduay significant everns and transactions such as acquistions or disposals of subsidiarica. businesses, or ploduct lines during the year? Completed by: Reviewed by Any Remoining alsk Na. The company uses conservative metheds to record reverue and pronces an adequane reserve tor returned merchandse. Cortwhes Clothiers generates revenue meinly through the sale of righ-qualify cothing for cutdoer sports, such as hising sking, flystining, and white-water kbyaking The company's product ines also include casual clathes, accessories, shoes, and sot luggage. These sales are mace mainly trough the companys toll-free number and over ts imtemet webstes. in 202t, intenet sales accourted for 21 percent of toss revenue. The company's key customers are the 21.5 million persons on NNo. As maling list, aporocomstey 7 milion of whom bie viewed as 'curvent customers' because they have purchased from the compary in the last 24 months. Market research as of junuary 2021 indicates that appeovimately 50 percent of customers are in the 35-54 age group and had a median income of \$02.000. Aimost two-thires are in protossional or managerial positions. During 2021, the compary had purchase orders for merchancise from sbout 300 domestic and foreign manufacturers, including intermediaries (agents) One manufacturer and one imermediary accounted for about 14 and 29 percent of the company's received merchandioe dolars, respectively, in 2021. in 2021, about 80 percent of the meschandise was impoted, mainy from Asia, Centrai America, Mevico, South America, and Europe. The remaining 20 percent was made in the Unted States. The company will continue to take advantage of worictivide sourcing without sacificing customer service of qualiy standares. The company has a well developed organizational structure with clear Ines of asthorty among the valious operaing departments and staff functiona. The organizational steucture is mppropriate for EarthWear's ectivities. Bose, Idaho, is the main corporate location. Eartwear also has phone and distribution centors in the Unitod Kingdom, Germany, and Jagan. During 2021, Earth-Wear exomded its giobal internet presence by launching sites in France, kak. Ireland, and several eastern European countries. The major assets of the company are imentory. property. plant, and ecolpmem; and iss customer maling les. The company has no long term debt. However, it maintains a Ine of credit for financing purchases during the peak purshasing seunon. The company uses its line of creda to meet its norms finaneing activeses Overal the companys tinancial condition is good. Yes. The compary would be subject to some risk in friding atemative sourcing if this manufacturer andior intermedary euperiences prolonged work stoppages or exonomic probiems. The avalabaliy and cost certain foreign products may be aHected by United States and other countries trade policles, economic owonts, and the value of the US. doilar ielotive to foreign currencies. No. Ves. France and lay have restrictive trace lawa where local companes get a certain degree of protection from the goverment when their markets are threatened. Political inatability in the eastein European coumilies could afloct Earthloar's sales activites in these countries. No. No. The compeny hes adequate cash fow so meet its current obigstions. Na. No. The expansion of the company's internet presence to France. haly, ireland, and several eastem European counties. Yes. Restriktive trede laws and the poterrial for political instability in the eastein European courtries. Does the entity have any Na No. A Partlal Questionnalre for Documenting the Understanding of EartwWear Clothlets and its Environment CUIENT NAME: EARTHWEAR CLOTHIERS Entity and Environment Category: Nature of the Entity Year ended December 31, 2021 Prok Fockars What are the entitys major. sources of revenue. inckueing the neture of its products andior services? Who are the entity's key customers? Who are the entry's key supplers? What is the entity: organitational structure? Where ale its major locationa? What are the entitys major assets? What are the entity's major lasities? What are the entitys finarkia characteristics including financing sources and current and proapective financial condilion? Are there any poterkial related parties? Are there any neviduay significant everns and transactions such as acquistions or disposals of subsidiarica. businesses, or ploduct lines during the year? Completed by: Reviewed by Any Remoining alsk Na. The company uses conservative metheds to record reverue and pronces an adequane reserve tor returned merchandse. Cortwhes Clothiers generates revenue meinly through the sale of righ-qualify cothing for cutdoer sports, such as hising sking, flystining, and white-water kbyaking The company's product ines also include casual clathes, accessories, shoes, and sot luggage. These sales are mace mainly trough the companys toll-free number and over ts imtemet webstes. in 202t, intenet sales accourted for 21 percent of toss revenue. The company's key customers are the 21.5 million persons on NNo. As maling list, aporocomstey 7 milion of whom bie viewed as 'curvent customers' because they have purchased from the compary in the last 24 months. Market research as of junuary 2021 indicates that appeovimately 50 percent of customers are in the 35-54 age group and had a median income of \$02.000. Aimost two-thires are in protossional or managerial positions. During 2021, the compary had purchase orders for merchancise from sbout 300 domestic and foreign manufacturers, including intermediaries (agents) One manufacturer and one imermediary accounted for about 14 and 29 percent of the company's received merchandioe dolars, respectively, in 2021. in 2021, about 80 percent of the meschandise was impoted, mainy from Asia, Centrai America, Mevico, South America, and Europe. The remaining 20 percent was made in the Unted States. The company will continue to take advantage of worictivide sourcing without sacificing customer service of qualiy standares. The company has a well developed organizational structure with clear Ines of asthorty among the valious operaing departments and staff functiona. The organizational steucture is mppropriate for EarthWear's ectivities. Bose, Idaho, is the main corporate location. Eartwear also has phone and distribution centors in the Unitod Kingdom, Germany, and Jagan. During 2021, Earth-Wear exomded its giobal internet presence by launching sites in France, kak. Ireland, and several eastern European countries. The major assets of the company are imentory. property. plant, and ecolpmem; and iss customer maling les. The company has no long term debt. However, it maintains a Ine of credit for financing purchases during the peak purshasing seunon. The company uses its line of creda to meet its norms finaneing activeses Overal the companys tinancial condition is good. Yes. The compary would be subject to some risk in friding atemative sourcing if this manufacturer andior intermedary euperiences prolonged work stoppages or exonomic probiems. The avalabaliy and cost certain foreign products may be aHected by United States and other countries trade policles, economic owonts, and the value of the US. doilar ielotive to foreign currencies. No. Ves. France and lay have restrictive trace lawa where local companes get a certain degree of protection from the goverment when their markets are threatened. Political inatability in the eastein European coumilies could afloct Earthloar's sales activites in these countries. No. No. The compeny hes adequate cash fow so meet its current obigstions. Na. No. The expansion of the company's internet presence to France. haly, ireland, and several eastem European counties. Yes. Restriktive trede laws and the poterrial for political instability in the eastein European courtries. Does the entity have any Na No