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 (Links to an external site.) and 4.3 (Links to an external site.) 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.

1. 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.
2. 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.

You can click the picture to see bigger or clear

October 31, 2021 Debit Credit $ 6,123,884 64,867,910 $ 648,679 57,900,000 13,805,769 3,584,615 6,446,154 97,576,923 35,207,692 3,851,923 8,410,849 Cloud 9 Trial Balance October 31, 2022 Debit Credit Cash and cash equivalents $ 13,446,154 Accounts receivable 70,485,625 Allowance for doubtful accounts $ 704,856 Inventory 55,100,000 Investments (derivatives) 13,419,231 Deferred income taxes (current) 2,857,692 Prepaid expenses and other current assets 9,265,385 Property, plant, and equipment 103,803,846 Accumulated depreciation 39,761,538 Identifiable intangible assets and goodwill 3,723,007 Accumulated amortization Deferred income taxes and other assets (noncurrent) 9,557,692 Current portion of long-term debt 2,115,385 Notes payable 21,376,923 Accounts payable 14,986,457 Accured liabilities 25,803,846 Income taxes payable 2,211,539 Long-term debt 23,661,538 Deferred income taxes and other liabilities (noncurrent) 4,915,384 Common stock at par value 111,538 Capital stock in excess of par value 19,415,385 Unearned stock compensation 253,846 Accumulated other comprehensive income 5,011,538 Beginning retained earnings 122,857,692 Dividends 3,866,838 Repurchases of common stock 4,627,381 Revenue 277,338,461 Cost of sales 169,346,154 Selling and administrative 79,092,308 Interest expense 1,438,461 Other expense 453,846 Income tax expense 9,511,538 Totals $555,260,542 $555,260,542 300,125 34,823,077 22,561,538 24,150,000 3,726,923 17,119,106 4,330,769 107,692 16,484,615 480,769 4,746,154 98,150,473 3,299,423 2,939,393 269,442,308 163,003,846 78,246,154 1,773,077 757,692 9,238,462 $527,052,997 $527,052,997 Cloud 9 Condensed Cash Flow Statement For the year ended January 31, 2022 January 31, 2021 Cash provided by operations $ 25,250,000 $ 26,907,692 Cash used by investing activities (13,165,385) (16,923,077) Cash used by financing activities (13,457,692) (9,696,154) Effect of exchange rate changes on cash 3,284,616 1,873,077 Net increase in cash and cash equivalents 1,911,539 2,161,538 Cash and cash equivalents, beginning of year 9,780,769 7,619,231 Cash and cash equivalents, end of year $ 11,692,308 $ 9,780,769 Cloud 9 Consolidated Balance Sheet January 31, 2022 January 31, 2021 $11,692,308 62,361,538 54.773,077 14,460,577 3.357,692 5,250,000 $ 9,780,769 60,361,539 55,615,385 14,852,885 3,288,461 7,276,923 $151,895,192 62,261,539 3,820,192 5,853,846 $223,830,769 $151,175,962 60,900,000 3,950,961 9,238,462 $225,265,385 Assets Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385 Inventory Investments (derivatives) Deferred income taxes Prepaid expenses and other current assets Total current assets Property, plant, and equipment, net Identifiable intangible assets and goodwill, net Deferred income taxes and other assets Total assets Liabilities and Stockholders' Equity Current liabilties: Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Stockholders' equity: Common stock at par value Capital in excess of par value Unearned stock compensation Accumulated other comprehensive income Retaining earnings Total stockholders' equity Total liabilties and stockholders' equity $ 207,692 28,896,154 20,615,385 18,157,692 842,308 $ 1,926,923 35.546,154 20,915,385 23,336,581 582,650 $ 68,719,231 16,765,384 3,942,308 $ 82,307,693 18,088,462 4,253,846 107,692 17,669,231 (380,769) (5,850,000) 122,857,692 107,692 14,192,308 (450,000) (4,273,077) 111,038,461 134,403,846 $223,830,769 120,615,384 $225,265,385 Cloud 9 Consolidated Statement of Income For the year ended January 31, 2022 $364,953,846 For the year ended January 31, 2021 $345,965,385 Revenues Costs and expenses: Cost of sales Selling and administrative Interest expense Other (income)/expense, net Total costs and expenses Income before income taxes Income taxes Net income $222,496,154 104,450,000 1,257,692 1,311,539 $207,838,462 100,246,154 1,730,769 796,154 329,515,385 35,438,461 12,757,692 $ 22,680,769 310,611,539 35,353,846 13,080,769 $ 22,273,077 October 31, 2021 Debit Credit $ 6,123,884 64,867,910 $ 648,679 57,900,000 13,805,769 3,584,615 6,446,154 97,576,923 35,207,692 3,851,923 8,410,849 Cloud 9 Trial Balance October 31, 2022 Debit Credit Cash and cash equivalents $ 13,446,154 Accounts receivable 70,485,625 Allowance for doubtful accounts $ 704,856 Inventory 55,100,000 Investments (derivatives) 13,419,231 Deferred income taxes (current) 2,857,692 Prepaid expenses and other current assets 9,265,385 Property, plant, and equipment 103,803,846 Accumulated depreciation 39,761,538 Identifiable intangible assets and goodwill 3,723,007 Accumulated amortization Deferred income taxes and other assets (noncurrent) 9,557,692 Current portion of long-term debt 2,115,385 Notes payable 21,376,923 Accounts payable 14,986,457 Accured liabilities 25,803,846 Income taxes payable 2,211,539 Long-term debt 23,661,538 Deferred income taxes and other liabilities (noncurrent) 4,915,384 Common stock at par value 111,538 Capital stock in excess of par value 19,415,385 Unearned stock compensation 253,846 Accumulated other comprehensive income 5,011,538 Beginning retained earnings 122,857,692 Dividends 3,866,838 Repurchases of common stock 4,627,381 Revenue 277,338,461 Cost of sales 169,346,154 Selling and administrative 79,092,308 Interest expense 1,438,461 Other expense 453,846 Income tax expense 9,511,538 Totals $555,260,542 $555,260,542 300,125 34,823,077 22,561,538 24,150,000 3,726,923 17,119,106 4,330,769 107,692 16,484,615 480,769 4,746,154 98,150,473 3,299,423 2,939,393 269,442,308 163,003,846 78,246,154 1,773,077 757,692 9,238,462 $527,052,997 $527,052,997 Cloud 9 Condensed Cash Flow Statement For the year ended January 31, 2022 January 31, 2021 Cash provided by operations $ 25,250,000 $ 26,907,692 Cash used by investing activities (13,165,385) (16,923,077) Cash used by financing activities (13,457,692) (9,696,154) Effect of exchange rate changes on cash 3,284,616 1,873,077 Net increase in cash and cash equivalents 1,911,539 2,161,538 Cash and cash equivalents, beginning of year 9,780,769 7,619,231 Cash and cash equivalents, end of year $ 11,692,308 $ 9,780,769 Cloud 9 Consolidated Balance Sheet January 31, 2022 January 31, 2021 $11,692,308 62,361,538 54.773,077 14,460,577 3.357,692 5,250,000 $ 9,780,769 60,361,539 55,615,385 14,852,885 3,288,461 7,276,923 $151,895,192 62,261,539 3,820,192 5,853,846 $223,830,769 $151,175,962 60,900,000 3,950,961 9,238,462 $225,265,385 Assets Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385 Inventory Investments (derivatives) Deferred income taxes Prepaid expenses and other current assets Total current assets Property, plant, and equipment, net Identifiable intangible assets and goodwill, net Deferred income taxes and other assets Total assets Liabilities and Stockholders' Equity Current liabilties: Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Stockholders' equity: Common stock at par value Capital in excess of par value Unearned stock compensation Accumulated other comprehensive income Retaining earnings Total stockholders' equity Total liabilties and stockholders' equity $ 207,692 28,896,154 20,615,385 18,157,692 842,308 $ 1,926,923 35.546,154 20,915,385 23,336,581 582,650 $ 68,719,231 16,765,384 3,942,308 $ 82,307,693 18,088,462 4,253,846 107,692 17,669,231 (380,769) (5,850,000) 122,857,692 107,692 14,192,308 (450,000) (4,273,077) 111,038,461 134,403,846 $223,830,769 120,615,384 $225,265,385 Cloud 9 Consolidated Statement of Income For the year ended January 31, 2022 $364,953,846 For the year ended January 31, 2021 $345,965,385 Revenues Costs and expenses: Cost of sales Selling and administrative Interest expense Other (income)/expense, net Total costs and expenses Income before income taxes Income taxes Net income $222,496,154 104,450,000 1,257,692 1,311,539 $207,838,462 100,246,154 1,730,769 796,154 329,515,385 35,438,461 12,757,692 $ 22,680,769 310,611,539 35,353,846 13,080,769 $ 22,273,077