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 Questionnaire for Documenting the Understanding of cathlalnar rlathinm and ito Ensimamant PLEASE ENTER YOUR ANSWERS ON THE QUESTIONNAIRE WORKSHEET. The fields in yellow will be filled Iutomatically as you enter your answers on he Questionnaire. You may need to RESIZE the rows to display your answers. A Questionnaire for Documenting the Understanding of cathlalnar rlathinm and ito Ensimamant PLEASE ENTER YOUR ANSWERS ON THE QUESTIONNAIRE WORKSHEET. The fields in yellow will be filled Iutomatically as you enter your answers on he Questionnaire. You may need to RESIZE the rows to display your answers