Identification of Accounts with Unexpected FluctuationsDecember 31, 20191. Establish Threshold for Unexpected FluctuationsTo begin identifying accounts with unexpected fluctuations auditors must establish a threshold for account difference. All accounts whose actual 2019 unaudited account balance differs from the expected balance by a value greater than the threshold established will be shown in the charts below. As a general rule the threshold should not exceed materiality. For the purposes of this exercise we assume planning materiality is $3.1 million. Enter this value in the field below as 3100.A. Set threshold for account difference in thousands(e.g., 3100)Enter threshold here.Please enter number in thousands.2. Evaluate Unexpected FluctuationsLists of Balance Sheet and Income Statement accounts have been generated below based on your threshold for account difference. In the "Evaluation" column please identify2 or more balance sheetand2 or more income statementaccountswhere you believe the difference presents increased risk of material misstatement that may require a change in the nature, timing or extent of planned audit procedures. Please indicate possible reasons for the difference, potential risks, and suggested audit plan revisions.A. Balance Sheet AccountsAccountDifference from ExpectationsEvaluationB. Income Statement AccountsAccountDifference from ExpectationsEvaluation

Advanced Module 1 [pp. 151 -160] discusses several ARP approaches including 'trend analyses'. Assume you are a staff member of an audit firm which is auditing 2015 unaudited financials. You are asked to use trend analysis in the planning stage to identify 2015 accounts with possible evidence of RM [Risk of Misstatement]. 1. [Calculations]. Prepare a common size income statement for ABC Sports which adds to the attached spreadsheet, columns for common size percentages. Also add percentage differences and dollar differences for 2015 vs 2014. These differences provide audit evidence of 'trend' [year to year changes]. 2. [Judgment] Highlight the two most audit-interesting percentage and dollar differences [trends] 3. [Analytical reasoning] Explain why they are interesting to the auditor [to you] including describing the audit risk that concerns you including saying whether you are concerned with overstatement or understatement in the accounts you have highlighted. 4. Suggest one specific additional calculation that would also provide interesting ARP evidence. ABC SPORTS Consolidated Statements of Comprehensive Income (In thousands, The 2015 data are unaudited) 2015 2014 201 $950 484 $857 885ABC SPORTS Consolidated Statements of Comprehensive Income (In thousands, The 2015 data are unaudited) 2015 2014 2013 Net Sales $950,484 $857,885 $891,394 Cost of sales 546,393 472,739 490,530 Gross Profit $404,091 $385,146 $400,864 Selling, general and administrative expenses 364,012 334,994 353,890 Non-recurring charge (credit) (1,153) 8,190 come from operations $40,079 $51,305 $38,784 Other income (expense): Interest expense (983) (1,229) (5,027) Interest income 1,459 573 10 Gain on sale of subsidiary Other (4,798) (1,091) (1,593) Total other income (expense), net (4,322) ($1,747) ($6,610) ncome before income taxes 35,757 49,559 32,174 come tax provision 13,230 18,337 11,905 Net income 22,527 $31,222 $20,269EARTHWEAR CLOTHIERS 5-2 Preliminary Analytical Procedures Initial Here Summary of Ratio Analyses & Assessment of Financial Condition 10/30/20 December 31, 2019 1. Comments and Summary Based on your review of work paper 5-1, list one or two ratios in each of the following categories that you believe increase the risk of potential misstatement. Explain why you believe the risk is increased and identify possible causes of a potential misstatement and For example, "Days of Inventory on Hand" increased significantly indicating merchandise is held in inventory for a longer period than prior years and it is also held for a longer period than the industry average. This increases the risk of obsolete inventory SHORT-TERM LIQUIDITY RATIOS: Enter your response here (This cell will expand automatically to fit your response - use ALT+ ENTER to begin a new line) ACTIVITY RATIOS: Enter your response here (This cell will expand automatically to fit your response - use ALT+ENTER to begin a new line) PROFITABILITY / PERFORMANCE RATIOS: Enter your response here (This cell will expand automatically to fit your response - use ALT+ENTER to begin a new line) COVERAGE RATIOS: Enter your response here (This cell will expand automatically to fit your response - use ALT+ENTER to begin a new line) 2. Assessment of Financial Position Based on your review of work paper 5-1, assess the client's ability to continue as a going concern (to stay in business) by responding to the following questions. A. Identify ratios and trends, if any, that cause concern about the client's ability to continue as a going concern Enter your response here (This cell will expand automatically to fit your response - use ALT+ENTER to begin a new line) B. Identify ratios and trends, if any, that indicate a high likelihood that the client will continue successfully as a going concern Enter your response here (This cell will expand automatically to fit your response - use ALT+ ENTER to begin a new line) C. Assess the client's financial condition as one of the following (select one from the drop down list in cell B35) Click on the yellow cell above and the drop down list button will appear in the far right side of the cell. Your selection will then appear in this box. You can change your selection using the drop down list. D. Briefly explain the reasoning behind your assessment. Enter your response here (This cell will expand automatically to fit your response - use ALT+ENTER to begin a new line)EARTHWEAR CLOTHIERS Identification of Accounts with Unexpected Fluctuations December 31, 2019 1. Establish Threshold for Unexpected Fluctuations To begin identifying accounts with unexpected fluctuations auditors must establish a threshold for account difference. All accounts whose actual 2019 unaudited account balance differs from the expected balance by a value greater than the threshold established will be shown in the charts below. As a general rule the threshold should not exceed materiality. For the purposes of this exercise we assume planning materiality is $3.1 million. Enter this value in the field below as 3100. A. Set threshold for account difference in thousands (e.g., 3100) Enter threshold here. Please enter number in thousands. 2. Evaluate Unexpected Fluctuations Lists of Balance Sheet and Income Statement accounts have been generated below based on your threshold for account difference. In the "Evaluation" column please identify 2 or more balance sheet and 2 or more income statement accounts where you believe the difference presents increased risk of material misstatement that may require a change in the nature, timing or extent of planned audit procedures Please indicate possible reasons for the difference, potential risks, and suggested audit plan revisions. IA. Balance Sheet Accounts Account Difference from Expectations Evaluation B. Income Statement Accounts Account Difference from Expectations EvaluationEARTHWEAR CLOTHIERS 5-4 Common-size Consolidated Balance Sheet SAA 1/3/2020 December 31 2019 2017 Actual Difference Dollar Value Dollar Value Dollar Value Dollar Value Assets Assets Assets Assets Assets Cash and cash equivalents 16.75% 14.84% $48,288 13.29% $79,359 $31,071 Receivables, net $11,539 3.89% $12,875 $14,211 3.91% $8,643 -1.69% Inventory $105,425 35.55% $122,337 37.08% $139,249 38.32% 37.93% $8,444 -0.39% Prepaid advertising $10,772 3.63% $11,458 3.47% $12,143 3.34% $10,212 2.629 ($1,932) -0.72% Other prepaid expenses $3,780 1.27% $6,315 1.91% $8,849 2.44% 1.40% ($3,414) Deferred income tax benefits $6,930 $7,132 $10,338 2.65% $3,003 0.64% otal current assets $188,115 63.44% 63.37% $230,075 63.31% $261,680 67.20% $31,604 3.88% 0.00% roperty, plant and equipment, at cost Land and buildings $66,804 $70,918 21.49% 20.65% $76,560 19.66% -0.99% $66,876 $67,513 20.46% $68,150 18.75% $68,632 17.62% $482 Fixtures and equipment Computer hardware and software $47,466 16.01% 19.70% $82,507 22.70% $75,400 ($7,107) Leasehold improvements $2.894 0.98% $3,010 0.91% 0.86% 0.81% $20 -0.05% Total property, plant and equipment 62.07% $228,812 62.97% ($5,076) -5.51% Less - accumulated depreciation and amortization $76,256 26.06% $95,716 $97,722 $2,007 1.25% $107,784 36.35% $120,440 $133,097 ($7,082) tangibles, ne $628 0.21% $423 0.13% $218 0.069 $1,734 $1,516 otal assets $296,527 100.00% $329,959 100.00% 100.00% $389,428 100.00% .00% iabilities and shareholder's investment Current liabilities $7,621 2.57% $11,011 $14,401 3.96% $10,510 2.70% ($3,892) -1.26% $48,432 16.33% $62,509 18.94% $76,587 21.08% $54,186 13.91% ($22,401) -7.16% Reserve for returns $5, 115 $5,890 1.78% 1.83% $6,100 1.57% ($565 -0.27% Accrued liabilities $28,440 $26,738 8.10% $25,035 6.89% 7.839 $5.456 0.94% Accrued profit sharing $1,794 0.61% 0.46% $1,270 0.35% $3,108 0.45% Income taxes payable $6,666 2.25% $8.58 $10,511 $16,222 1.27% $98,067 33.07% $116,268 35.24% $134,469 37.00% $120,617 30.97% ($13,853) 6.03% otal current liabilities eferred income taxes $5.926 2.00% 9.46 $13,011 .149 $4,666) 1.44% hareholders' investment: Common stock, 26,144 shares issued $261 0.09% $261 $261 $261 $0 0.00 Donated capital $5,460 1.84% $5,460 1.65% $5,460 1.50% 1.40% -0.10% al paid-in $19,311 6.51% $20,740 6.29% $22,170 $25,719 $3,550 0.50% Deferred compensation ($153) 0.05% ($79) .0.02% ($4) ($36) 0.01% $33 -0.01% Accumulated other comprehensive income $1,739 0.59% $3.883 1.18% $6.027 1.66% $2,173 ($3,855) -1.10% Retained earnings $295,380 $317,907 96.35% $361,402 92.80% $20,968 -0.88% Treasury stock, 6,654, 7,114, and 6,546 shares at cost, respectively $192,535 $204,222 61.89% $215,910 59.42% $260,467 66.88% $44,557 7.47% $296,527 100.00% $329,959 100.00% 100.00% 100.00% 0.00% otal liabilities and shareholders' investment $389,428