What's the answers to missing tickmarks and document ({b}, {e}, and {k})?
Case 06-06 Elite Running, Inc. You are a second year staff accountant assigned to the Elite Running, Inc. (the \"Company\") engagement (an August 31 year end). As part of your assignment, you will be responsible for assisting the senior accountant in various aspects of the engagement, including planning, substantive audit procedures, audit wrap-up and financial statement reporting. Initially, you and the senior accountant were scheduled to begin the audit on Monday and complete the engagement within four weeks. However, your senior accountant had another engagement that required her immediate attention. Therefore, you will start the audit engagement without her. However, she is expected to rejoin the engagement by Wednesday or Thursday. Since you have not previously been on this engagement, the senior left you a detailed list of instructions in order to expedite the audit. The first item on your list is to perform the preliminary analytical procedures on the current year financial statements. These procedures are required under generally accepted auditing standards to assist the auditor in identifying significant changes to the Company, in addition to identifying potential audit risks. The senior started these procedures, but she was unable to complete them before the other engagement needed her assistance. The following is a detailed list of your instructions. Instructions 1) Obtain an understanding of the Company by reading the background information contained in the workpapers. 2) Compare the current year financial information to the prior year financial information. Identify the balance sheet and income statement variances in these amounts that appear to be material. The current year engagement materiality is $800,000. 3) Obtain sufficient explanations for the identified variances by talking to the accounts receivable manager, treasury director, inventory manager, and the sales and marketing manager. If your initial inquiries are not answered satisfactorily, please make additional inquiries. You may discuss issues with the controller, if necessary, but the controller should not be your primary contact. Required: Based upon the procedures performed, discuss any significant changes in Elite's business or the industry overall that you identified. Additionally, for any identified significant changes, discuss any related accounting/auditing issues. Copyright 2004 Deloitte Development LLC All Rights Reserved. Case 06-06: Elite Running Page 2 Related to any identified issues, what audit procedures would you consider adjusting or adding? Elite Running, Inc. Overview Elite Running, Inc. (the \"Company\" or \"Elite\") designs, manufactures and markets superior, high-performance athletic footwear and apparel. The Company's products include: Running, walking and outdoor trail shoes sold under the Elite name Athletic apparel sold under the Elite \"Winning Feel\" name. The Company sells its products to distributors located throughout the country. The distributors ultimately sell the Company's product to retail stores, not owned by Company, where the ultimate end user can purchase the products. Elite Products Footwear Elite has sold premium running, walking and trail shoes in the United States for over 35 years. A substantial portion of Elite's sales comes from running shoes. Elite has a number of men's and women's running shoes with different designs and features. Elite's market focus is on the \"real athlete,\" or those who are serious about their sport. Very few customers choose Elite running shoes for casual wear. In fact, a large portion of the athletes who purchase Elite products become loyal and recurring customers. Elite's management believes this is because they are recognized in the industry for their technical innovation and performance. Furthermore, management believes Elite products have a distinct \"feel\" unmatched by their competitors. Most of Elite's footwear products range in price from $65 a pair to the top-of-the-line running shoe priced at $125 per pair. Elite's prices are competitive, albeit slightly higher, than most competitors. Management believes their customer base is willing to pay a premium for the technical innovation and performance features in their shoes. Athletic Apparel Elite sells and manufactures a full line of performance apparel under the \"Winning Feel\" brand name. This apparel is used in a variety of sports, namely running, bicycling and aerobics. Elite believes their ultimate customers value the quality of their apparel and the technology that immediately transfers moisture out of the apparel to enhance comfort. Much like Elite's footwear customer, Elite's apparel customers are serious athletes rather than casual consumers. Product Design and Development Elite's strategy is centered on superior product design. Management's goal is to continually improve their design to satisfy athletes, their ultimate customer. Elite's design and development team consults with professionals, including podiatrists, orthopedists, Copyright 2004 Deloitte Development LLC All Rights Reserved. Case 06-06: Elite Running Page 3 trainers and athletes to design a product. Elite maintains a staff of 20 design and development professionals in a state-of-the-art design facility located at the Company's headquarters in Nashville, Tennessee. Elite's Sales and Marketing Sales Elite sells its footwear and apparel through more than 5,000 retail outlets in the United States. These outlets generally offer high-end, full-margin products and include Feet Locker, Lady Feet Locker, Hippit Sporting Goods, and Road Running Sports. Elite has 35 independent regional sales representatives to service the majority of the retailers and five full-time staff to service their largest retailers - approximately 50. The independent sales representatives are paid on a commission basis, and are prohibited by contract from representing other brands of running shoes. Sales of running shoes and related apparel are not considered a seasonal business. The Company and its competitors traditionally experience consistent sales volume monthover-month. Marketing Consumer demand for running shoes is influenced by brand image. Elite's marketing is directed to the ultimate consumer, the athlete. The Company advertises through print media, athlete endorsements and television. The Company runs magazine advertisements in \"Runner's World,\" \"Men's Health,\" and \"Shape.\" Elite sponsors various well-known runners, who wear Elite running shoes and Winning Feel apparel. Television advertisements generally appear on an \"ESPN\" network. An Industry Overview The athletic footwear industry is highly competitive. In the US, the largest marketers of footwear are Nike and Adidas. Both of these companies have substantially greater financial, distribution and marketing resources, as well as greater brand awareness, than Elite. Elite competes against Nike and Adidas, as well as other companies, serving a similar niche in the running industry as New Balance and Asics. Due to the recognition of fitness as a key to maintaining long-term health, Elite believes that the market as a whole is growing. At the conclusion of the prior year audit, Elite was maintaining its market share. Technology Product innovation is a key competitive factor in the running shoe industry. The major industry players position themselves as technology and performance leaders and heavily advertise this aspect of their products. There is a risk that Elite could lose market share rapidly, if a major innovation were to be developed by a competitor. The risk is mitigated Copyright 2004 Deloitte Development LLC All Rights Reserved. Case 06-06: Elite Running Page 4 by the fact that there are so many different product innovations on the market at any one time that it is unlikely that one system will become predominant over all the others. Differences in feel and performance are likely to come down to an athlete's personal preference at the top end of the market. In addition, Elite has invested heavily in its own R&D and is recognized in the industry as being strong on innovation and performance. Copyright 2004 Deloitte Development LLC All Rights Reserved. Case 06-06: Elite Running BALANCE SHEET: Page 5 August August 31, 2003 31, 2002 (000s) (000s) Difference % Difference $ 603 {a} (6,998) {b} Cash Accounts Receivable (net) 809 60,478 206 67,476 292.7% -10.4% QUICK ASSETS 61,287 67,682 -9.4% Inventory Other Current Assets 63,526 12,437 45,713 14,673 39.0% -15.2% TOTAL CURRENT ASSETS 137,250 128,068 7.2% Property, Plant & Equipment (net) 135,899 123,954 9.6% 11,945 {d} TOTAL ASSETS 273,149 252,022 8.4% 21,127 14,589 61,553 51,291 4,153 67,894 11,000 9,940 251.3% -9.3% -100.0% 416.0% TOTAL LIABILITIES 127,433 92,987 37.0% Share capital Share premium Retained Earnings 7,899 32,436 105,381 7,899 32,436 118,700 -11.2% TOTAL EQUITY 145,716 159,035 -8.4% (13,319) TOTAL LIABILITIES & EQUITY 273,149 252,022 8.4% 21,127 Current Year 2003 Prior Year 2002 350,222 296,989 460,644 345,483 Bank indebtedness Payables Income taxes payable Long-Term Debt INCOME STATEMENT Net Revenue Cost of Sales Difference % (6,395) 17,813 {e} (2,236) {c} 9,182 10,436 (6,341) (11,000) 41,351 {f} {h} {g} {m} 34,446 - {i} - {i} (13,319) {j} Difference $ -24.0% -14.0% (110,422) {k} (48,494) {k} -53.8% (61,928) {k} {k} (1,696) {o} (314) {a} 889 {n} GROSS PROFIT GROSS PROFIT % 53,233 115,161 15% 25% Administration Selling Finance 27,688 35,595 2,715 29,384 35,909 1,826 -5.8% -0.9% 48.7% OPERATING (LOSS)/INCOME (12,765) 48,042 -126.6% (60,807) (LOSS)/INCOME BEFORE TAXES (12,765) 48,042 -126.6% (60,807) (4,446) (8,319) 17,775 30,267 -125.0% -127.5% (22,221) {g} (38,586) 5,000 15,000 -66.7% (10,000) {l} Income Taxes (Benefit)/Expense NET (LOSS)/INCOME Dividends declared and paid Copyright 2004 Deloitte Development LLC All Rights Reserved. Case 06-06: Elite Running Page 6 Tickmarks {a} The fluctuation falls below the established thresholds and no further investigation is needed. {b} {c} Decrease represents lower prepayment of rent expense of $6 million in the current year as a result of management attempting to better manage its cash flow. This decrease was partially offset by an increase in deferred tax assets as a result of the current year loss. {d} Increase is net property, plant and equipment is the result of spending on Swampland expansion ($20 million) and depreciation expense of approximately $8 million. Change appears reasonable. {e} {f} Elite uses a short-term credit for which they pay 12% interest. The audit team also inquired about the increase of the bank indebtedness--the finance manager indicated that Elite pays cash for the purchase of raw material made at the end of the year to realize a cash discount of 5%. {g} The decrease in the income taxes payable is consistent with the fact that the Company incurred a loss in the current year and is not subjected to income tax payments. See the increase in income tax receivable under other current assets. {h} Trade payables decreased $6,341,000 or 9.3%, moving from $67,894,000 in the prior year to $61,553,000 in the current year. Per the accounts payable accountant, the movement in trade payables is the result of Elite emphasizing containment of expenditures as a proper reaction to the downturn in business. Therefore, purchases in the last month of the year (excluding the $10 million inventory receipt and payment) were much lower than in prior years, resulting in a fall in trade payables. {i} No change from prior year which is reasonable as no share transactions occurred during 2002 to date {j} The change in retained earnings is a result of the current year net loss and payment of dividends. {k} {l} W e noted dividends declared and paid in the current year were less as a result poor operating performance. {m} Elite increased their long term debt during the current fiscal year to fund the Swampland expansion. The remaining increase was used to fund operations as a result of poor operating cash flow in the current year. {n} The increase in financing expense is a result of higher weighted-average debt balances during the current year as compared to the prior year. {o} Administration expense decreased because sales decreased, and as a result, an emphasis was put on cost containment. Copyright 2004 Deloitte Development LLC All Rights Reserved
