ACC562 Assignment 4 - Week 8 Assignment#4 Week 8...

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Week 8: Assignment #4 1 Week 8: Assignment #4 ─ “Just for Feet” Strayer University Week 8: Assignment #4 ─ “Just for Feet”
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Week 8: Assignment #4 2 Discuss Three Management Events that Occurred that Should Have Been a “Red Flag” to the Auditing Firm Three management events that occurred that should have been a “red flag” to the auditing firm include the following. 1. Recognizing unearned and fictitious receivables and revenue from its vendors. 2. Failing to properly book excess, worthless, and obsolete inventory. 3. Recording the value of vendor-provided display booths as income. Recognizing Unearned and Fictitious Receivables and Revenue from Its Vendors Just for Feet routinely recorded anticipated vendor allowances as receivables and advertising expense offsets well before the related advertising or promotional programs had been completed. Just for Feet incurred large amounts of advertising expenses. Most of the Company’s vendors offered financial assistance through unwritten agreements to Just for Feet to help pay for these expenses. This assistance was termed “advertising co-op” or “vendor allowances.” Each year, Just for Feet received millions of dollars of “vendor allowances” or “advertising co-op” from its major vendors in order to subsidize the advertising expenditures for its superstores. After Just for Feet advertised a product and paid for the advertising, the Company often was required to submit copies of the advertising materials to the vendor for approval before a vendor allowances credit was recorded. The vendor would then pay Just for Feet an allowance based largely upon the amount of the advertised products that the company had purchased. Generally, Just for Feet was required by generally accepted accounting principles (GAAP) to refrain from recognizing these vendor allowances and the related receivables until the revenue was earned or realizable . In addition, accounting to GAAP, vendor allowances could not be offset against advertising expenses until the given advertisements had been run or other promotional efforts
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Week 8: Assignment #4 3 had been completed. However, Just for Feet’s management team was particularly aggressive in “frontloading” vendor allowances during fiscal 1998. Failing to Book Excess, Worthless, and Obsolete Inventory Just for Feet had a material amount of excess or obsolete inventory at the end of fiscal 1998, but failed to adjust its inventory obsolescence reserve to reflect the increase in its excess and unsalable inventory. The primary audit procedure used by Deloitte during the 1998 audit to assess the reasonableness of the client’s inventory valuation reserve was to obtain and test an inventory “reserve analysis” prepared by a company vice president. The inventory “reserve analysis” was supposed to include the three classes of inventory items: (a) shoe styles and types with only four pairs or less, (b) shoes and apparel selling for less than cost, and (c) items that had not been sold in the previous 12 months. All of these items were to be written down to the lower
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