Question

The following information was obtained from several accounting and auditing enforcement releases issued by the Securities and Exchange Commission (SEC) after its investigation of fraudulent financial reporting involving Just for Feet, Inc.:

Just for Feet, Inc., was a national retailer of athletic and outdoor footwear and apparel based in Birmingham, AL. The company incurred large amounts of advertising expenses and most vendors offered financial assistance through unwritten agreements with Just for Feet to help pay for these advertising expenses. If Just for Feet promoted a particular vendor’s products in one of its advertisements, that vendor typically would consider agreeing to provide an “advertising co-op credit” to the Company to share the costs of the advertisement. Just for Feet offset this co-op revenue against advertising expense on its income statement, thereby increasing its net earnings. Although every vendor agreement was somewhat different, Just for Feet’s receipt of advertising co-op revenue was contingent upon subsequent approval by the vendor. If the vendor approved the advertisement, it would usually issue the co-op payment to Just for Feet in the form of a credit memo offsetting expenses on Just for Feet’s merchandise purchases from that vendor. The company’s CFO, controller, and VP of Operations directed the company’s accounting department to book co-op receivables and related revenues that they knew were not owed by certain vendors, including Asics, New Balance, Nike, and Reebok. These fraudulent practices resulted in over $19 million in fictitious pretax earnings being reported, out of total pretax income of approximately $43 million. The SEC ultimately brought charges against a number of senior executives at Just for Feet and some vendor representatives.

Required

1. What does it mean to approach an audit with an attitude of professional skepticism?

2. What circumstances related to the accounting treatment of the vendor allowances should increase an auditor’s professional skepticism?

3. What factors might have caused the auditor to inappropriately accept the assertions by management that the vendor allowances should be reflected in the financial statements?

4. Develop three probing questions related to the vendor allowances that the auditor should have asked in the audit of Just for Feet’s financial statements.

Answer 1

Answer :-

a ) :-

Proficient wariness basically comprises of two parts :

• An inquiry mind and a basic appraisal of the review proof .
• A scrutinizing attitude implies the reviewer approaches the review with a " trust however check " mental viewpoint , just as a basic appraisal of the proof that incorporates making testing inquiries and thoughtfulness regarding in irregularities .

b ) ;-

• Since the merchant recompense assertions were unwritten , this ought to have expanded the examiner's expert incredulity .
• Likewise , increments in the measure of the remittances and the cozy connection between only for feet and the merchants ought to have expanded proficient suspicion .

c ) :-

• Evaluator's might be slanted to acknowledge customer portrayals due to a characteristic inclination to need to confide in the customer .
• Also , if these recompenses had been utilized in the examiner may have been progressively disposed to acknowledge them as a standard business practice .

d ) :-

Coming up next are the instances of three examining questions identified with the merchant stipends:

1. Are there composed understandings or other certifying proof that would bolster the measure of these stipends ?
2. will explicit installments or credits be coordinated to explicit seller stipends?
3. for what reason are the recompenses more prominent this year contrasted with the earlier year ?