Cloud 9 - Continuing Case Part 1: Gain an Understanding of the Client W&S Partners began the planning phase of the Cloud 9 audit. As part of the risk assessment phase for the new audit, the audit team needs to gain an understanding of Cloud 9's structure and its business environment, determine materiality, and assess inherent risk. This will assist the team in developing an audit strategy and designing the nature, extent, and timing of audit procedures.

Required Answer the following questions based on the additional information about Cloud 9 presented in the appendix to this text and the current and earlier chapters. You should also consider your answer to the case study questions in earlier chapters where relevant.

Your task is to research the retail and wholesale footwear industries and report back to the audit team. Your report will form part of the overall understanding of Cloud 9's structure and its environment.

You should concentrate your research on providing findings from those areas that have a financial reporting impact and are considered probable given Cloud 9's operations. Use the factors listed in Illustrations 4.2 and 4.3 as a guide for your research.

Part 2: Analytical Procedures

Required Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.

a. Using analytical procedures and the information provided in the appendix, perform an analysis of Cloud 9's financial position and its business risks. Discuss the ratios indicating a significant or an unexpected fluctuation. b. Which specific areas do you believe should receive special emphasis during your audit? Consider your discussion of the analytical procedures results as well as your preliminary estimate of materiality. Prepare a memorandum to Suzie Pickering outlining potential problem areas (that is, where possible material misstatements in the financial statements exist) and any other special concerns.

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Cloud 9 Trial Balance October 31, 2022 October 31, 2021 Debit Credit Debit Credit Cash and cash equivalents $ 13,446,154 6,123,884 Accounts receivable 70,485,625 64,867,910 Allowance for doubtful accounts $ 704,856 $ 648,679 Inventory 55,100,000 57,900,000 Investments (derivatives) 13,805,769 13,419,231 Deferred income taxes (current) 2,857,692 3,584,615 Prepaid expenses and other current assets Property, plant, and equipment Accumulated depreciation 9,265,385 6,446,154 103,803,846 97,576,923 39,761,538 35,207,692 Identifiable intangible assets and goodwill 3,851,923 3,723,007 Accumulated amortization Deferred income taxes and other assets (noncurrent) 9,557,692 8,410,849 Current portion of long-term debt Notes payable Accounts payable 2,115,385 300,125 21,376,923 34,823,077 14,986,457 22,561,538 Accured liabilities 25,803,846 24,150,000 Income taxes payable 3,726,923 2,211,539 Long-term debt Deferred income taxes and other liabilities (noncurrent) 23,661,538 17,119,106 4,915,384 4,330,769 Common stock at par value Capital stock in excess of par value 111,538 107,692 16,484,615 19,415,385 Unearned stock compensation 480,769 253,846 Accumulated other comprehensive income Beginning retained earnings 5,011,538 4,746,154 122,857,692 98,150,473 Dividends 3,866,838 3,299,423 Repurchases of common stock 4,627,381 2,939,393 Revenue 277,338,461 269,442,308 Cost of sales 169,346,154 163,003,846 Selling and administrative Interest expense 79,092,308 78,246,154 1,438,461 1,773,077 Other expense 453,846 9,511,538 $555,260,542 757,692 Income tax expense 9,238,462 $527,052,997 Totals $555,260,542 $527,052,997 Cloud 9 Condensed Cash Flow Statement For the year ended January 31, 2021 January 31, 2022 Cash provided by operations Cash used by investing activities 26,907,692 25,250,000 (13,165,385) (16,923,077) Cash used by financing activities Effect of exchange rate changes Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (13,457,692) (9,696,154) 3,284,616 1,873,077 on cash 2,161,538 1,911,539 9.780,769 7,619,231 $ 11,692,308 $9,780,769 Cloud 9 Consolidated Balance Sheet January 31, 2022 January 31, 2021 Assets Current assets: 9,780,769 Cash and cash equivalents $11,692,308 Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385 62,361,538 60,361,539 55,615,385 Inventory Investments (derivatives) 54,773,077 14,460,577 14,852,885 Deferred income taxes 3.357,692 3,288,461 Prepaid expenses and other current assets Total current assets Z,276,923 5,250,000 $151,175,962 $151,895,192 Property, plant, and equipment, net 62,261,539 60,900,000 Identifiable intangible assets and goodwill, net 3,820,192 3.950,961 Deferred income taxes and other assets 5,853,846 9,238,462 Total assets $223,830,769 $225,265.385 Liabilities and Stockholders' Equity Current liabilties Current portion of long-term debt Notes payable 1,926,923 207,692 28,896,154 35,546,154 Accounts payable 20,615,385 20,915,385 Accrued liabilities 18,157,692 842,308 23,336,581 Income taxes payable 582,650 82,307,693 Total current liabilities 68,719,231 Long-term debt 16,765,384 18,088,462 Deferred income taxes and other liabilities 3,942,308 4,253,846 Stockholders' equity Common stock at par value 107,692 107,692 Capital in excess of par value Unearned stock compensation 14,192,308 17,669,231 (380,769) (450,000) Accumulated other comprehensive income (5,850,000) (4,273,077) Retaining earnings Total stockholders' equity 122,857,692 111,038,461 120,615.384 $225,265,385 134,403,846 $223,830,769 Total liabilties and stockholders' equity Cloud 9 Consolidated Statement of Income For the year ended January 31, 2022 For the year ended January 31, 2021 Revenues $364,953,846 $345,965,385 Costs and expenses: Cost of sales $222,496,154 $207,838,462 Selling and administrative 100,246,154 104,450,000 Interest expense 1,257,692 1,730,769 Other (income)/expense, net Total costs and expenses 796,154 1,311,539 329,515,385 310,611,539 Income before income taxes 35,438,461 35,353,846 13,080,769 22,273,077 Income taxes 12,757,692 Net income $22,680,769 Cloud 9 Trial Balance October 31, 2022 October 31, 2021 Debit Credit Debit Credit Cash and cash equivalents $ 13,446,154 6,123,884 Accounts receivable 70,485,625 64,867,910 Allowance for doubtful accounts $ 704,856 $ 648,679 Inventory 55,100,000 57,900,000 Investments (derivatives) 13,805,769 13,419,231 Deferred income taxes (current) 2,857,692 3,584,615 Prepaid expenses and other current assets Property, plant, and equipment Accumulated depreciation 9,265,385 6,446,154 103,803,846 97,576,923 39,761,538 35,207,692 Identifiable intangible assets and goodwill 3,851,923 3,723,007 Accumulated amortization Deferred income taxes and other assets (noncurrent) 9,557,692 8,410,849 Current portion of long-term debt Notes payable Accounts payable 2,115,385 300,125 21,376,923 34,823,077 14,986,457 22,561,538 Accured liabilities 25,803,846 24,150,000 Income taxes payable 3,726,923 2,211,539 Long-term debt Deferred income taxes and other liabilities (noncurrent) 23,661,538 17,119,106 4,915,384 4,330,769 Common stock at par value Capital stock in excess of par value 111,538 107,692 16,484,615 19,415,385 Unearned stock compensation 480,769 253,846 Accumulated other comprehensive income Beginning retained earnings 5,011,538 4,746,154 122,857,692 98,150,473 Dividends 3,866,838 3,299,423 Repurchases of common stock 4,627,381 2,939,393 Revenue 277,338,461 269,442,308 Cost of sales 169,346,154 163,003,846 Selling and administrative Interest expense 79,092,308 78,246,154 1,438,461 1,773,077 Other expense 453,846 9,511,538 $555,260,542 757,692 Income tax expense 9,238,462 $527,052,997 Totals $555,260,542 $527,052,997 Cloud 9 Condensed Cash Flow Statement For the year ended January 31, 2021 January 31, 2022 Cash provided by operations Cash used by investing activities 26,907,692 25,250,000 (13,165,385) (16,923,077) Cash used by financing activities Effect of exchange rate changes Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (13,457,692) (9,696,154) 3,284,616 1,873,077 on cash 2,161,538 1,911,539 9.780,769 7,619,231 $ 11,692,308 $9,780,769 Cloud 9 Consolidated Balance Sheet January 31, 2022 January 31, 2021 Assets Current assets: 9,780,769 Cash and cash equivalents $11,692,308 Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385 62,361,538 60,361,539 55,615,385 Inventory Investments (derivatives) 54,773,077 14,460,577 14,852,885 Deferred income taxes 3.357,692 3,288,461 Prepaid expenses and other current assets Total current assets Z,276,923 5,250,000 $151,175,962 $151,895,192 Property, plant, and equipment, net 62,261,539 60,900,000 Identifiable intangible assets and goodwill, net 3,820,192 3.950,961 Deferred income taxes and other assets 5,853,846 9,238,462 Total assets $223,830,769 $225,265.385 Liabilities and Stockholders' Equity Current liabilties Current portion of long-term debt Notes payable 1,926,923 207,692 28,896,154 35,546,154 Accounts payable 20,615,385 20,915,385 Accrued liabilities 18,157,692 842,308 23,336,581 Income taxes payable 582,650 82,307,693 Total current liabilities 68,719,231 Long-term debt 16,765,384 18,088,462 Deferred income taxes and other liabilities 3,942,308 4,253,846 Stockholders' equity Common stock at par value 107,692 107,692 Capital in excess of par value Unearned stock compensation 14,192,308 17,669,231 (380,769) (450,000) Accumulated other comprehensive income (5,850,000) (4,273,077) Retaining earnings Total stockholders' equity 122,857,692 111,038,461 120,615.384 $225,265,385 134,403,846 $223,830,769 Total liabilties and stockholders' equity Cloud 9 Consolidated Statement of Income For the year ended January 31, 2022 For the year ended January 31, 2021 Revenues $364,953,846 $345,965,385 Costs and expenses: Cost of sales $222,496,154 $207,838,462 Selling and administrative 100,246,154 104,450,000 Interest expense 1,257,692 1,730,769 Other (income)/expense, net Total costs and expenses 796,154 1,311,539 329,515,385 310,611,539 Income before income taxes 35,438,461 35,353,846 13,080,769 22,273,077 Income taxes 12,757,692 Net income $22,680,769