In this mini-case you will complete the questionnaire for understanding EarthWear Clothiers, Inc. and the environment in which it operates.

INSTRUCTIONS:

The worksheet titled "Questionnaire" contains a partially completed copy of the questionnaire. Scan through the questions and responses that have already been completed.

Refer to the information on the EarthWear Investor and Willis & Adams CPAs websites and the background document below to complete the questions.

Hint: Refer to the Company History/Background page and Consolidated Financial Statements on the EarthWear Website

A Questionnaire for Documenting the Understanding of EarthWear Clothiers and its Environment
CLIENTNAME: EARTHWEAR CLOTHIERS Completed by: SOLUTION
Entity and Environment Category: Nature of the Entity Reviewed by:
Year ended: December 31, 2016
	Risk Factors		Description/Response		Any Remaining Risk
	What are the entity’s major sources of revenue, including the nature of its products and/or services?
	Who are the entity’s key customers?
	Who are the entity’s key suppliers?
	What is the entity’s organizational structure?		The company has a well-developed organizational structure with clear lines of authority among the various operating departments and staff functions. The organizational structure is appropriate for EarthWear’s activities.		No.
	Where are its major locations?		Boise, Idaho is the main corporate location. EarthWear also has phone and distribution centers in the United Kingdom, Germany, and Japan.		No. None of these country locations pose threats to EarthWear as a result of expropriation or limits on repatriation of earnings.
	What are the entity’s major assets?
	What are the entity’s major liabilities?
	What are the entity’s financial characteristics including financing sources and current and prospective financial condition?		The company uses its line of credit to meet its normal financing activities. Overall the company’s financial condition is good.		No.
	Are there any potential related parties?		No.		No.
	Are there any individually significant events and transactions such as acquisitions or disposals of subsidiaries, businesses, or product lines during the year?		No.		No.
	Does the entity have any major uncertainties or contingencies?		No.		No.
	Do general economic conditions present any risks for the entity?		The company’s business is highly seasonal. Most of the company’s sales and profit are realized during the fourth quarter.		No. The company is aware of the importance of fourth quarter sales. The company continues to refine its catalog mailings, so quarterly results may fluctuate.
	Does the regulatory environment present any risks for the entity?		No.		No.
	Does the legal/political environment present any risks for the entity?		No.		No.
	Does the competitive industry environment present any risks for the entity? Identify any competitors.
	Do supplier dynamics present any risks for the entity?		No. The company has an adequate number of suppliers. No one supply can significantly affect the company’s operations.		No.
	Do customer dynamics present any risks for the entity?
	Do social/environmental factors present any risks for the entity?		No.		No.
	Do technological factors present any risks for the entity?
	Do accounting principles, including those that are industry-specific and determined by regulatory authority present any risks for the entity?		No.		No.
	Are there any other external factors that present a risk for the entity?		No.		No.
	Management philosophy and operating style:
	Do one or a few individuals dominate management and operating decisions?		No.		No.
	Are business risks adequately monitored?		Yes. The company manages its business risks through a business plan and a strong budgeting process. Senior management meet at least monthly to discuss the budget and events that might affect the company. The company also has a Strategic Risk Management Committee that is responsible for considering how future events (e.g., Internet sales) may affect the company.		No.
	Has management adopted sound accounting principles?		Yes.		No.
	Does management adequately consult with its auditor on accounting issues?		Yes. Management consults with us about new accounting issues.		No.
	Is management willing to adjust the financial statements for misstatements that approach a material amount?		Yes. Management are willing to book misstatements that we identify during the audit.		No.
	Does management give high priority to internal control?		Yes. Management issues a Management’s Report on Financial Statements that includes a statement about the adequacy of the company’s internal control system.		No.
	Has management established and maintained internal control that will, among other things, initiate, record, process, and report transactions consistent with management assertions in the financial statements?		Yes.		No.
	Has management been responsive to prior recommendations from its auditors?		Management has always been responsive to our recommendations on internal control.		No.
	Integrity and ethical values:
	Have appropriate entity policies regarding such matters as acceptable business practices, conflicts of interest, and codes of conduct been established and are they adequately communicated?		Yes.		No.
	Does management demonstrate the appropriate “tone at the top,” including explicit moral guidance about what is right or wrong?		Yes.		No.
	Are everyday dealings with customers, suppliers, employees, and other parties based on honesty and fairness?		Yes.		No.
	Does management document or investigate deviations from established controls?		Yes.		No.
	Commitment to competence: (see Exhibit 6-1)
	Does the company maintain formal or informal job descriptions or other means of defining tasks that comprise particular jobs?		Yes.		No.
	Does management determine to an adequate extent the knowledge and skills needed to perform particular jobs?		Yes.		No.
	Does evidence exist that employees have the requisite knowledge and skills to perform their job?		Yes.		No.
	Management characteristics:
	Is there a motivation for management to engage in fraudulent financial reporting? Specific indicators might include:		No. While management is motivated to maximize shareholder wealth, they are not motivated to engage in fraudulent financial reporting.		No.
	· A significant portion of management’s compensation represented by bonuses, stock options, or other incentives, the value of which is contingent upon the entity achieving unduly aggressive targets for operating results, financial position, or cash flow.
	· An excessive interest by management in maintaining or increasing the entity’s stock price or earnings trend through the use of unusually aggressive accounting practices.
	· A practice by management of committing to analysts, creditors, and other third parties to achieve what appear to be unduly aggressive or clearly unrealistic forecasts.
	· An interest by management in pursuing inappropriate means to minimize reported earnings for tax–motivated reasons.
	Is there a failure by management to display and communicate an appropriate attitude regarding internal control and the financial reporting process? Specific indicators might include:		No. See comments above.		No.
	· An ineffective means of communicating and supporting the entity’s values or ethics, or communication of inappropriate values or ethics.
	· Domination of management by a single person or small group without compensating controls such as effective oversight by the board of directors or audit committee.
	· Inadequate monitoring of significant controls.
	· Management failing to correct known reportable conditions on a timely basis.
	· Management setting unduly aggressive financial targets and expectations for operating personnel.
	· Management displaying a significant disregard for regulatory authorities.
	· Management continuing to employ an ineffective accounting, information technology, or internal auditing staff.
	Do nonfinancial management have excessive participation in, or preoccupation with, the selection of accounting principles or the determination of significant estimates?		No.		No.
	Is there high turnover of senior management, counsel, or board members?
	Are there strained relationship between management and the current or predecessor auditor? Specific indicators might include:		No.		No.
	· Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters.
	· Unreasonable demands on the auditor including unreasonable time constraints regarding the completion of the audit or the issuance of the auditor s reports.
	· Formal or informal restrictions on the auditor that inappropriately limit his or her access to people or information or his or her ability to communicate effectively with the board of directors or the audit committee.
	· Domineering management behavior in dealing with the auditor, especially involving attempts to influence the scope of the auditor s work.
	Is there a known history of securities law violations or claims against the entity or its senior management alleging fraud or violations of securities laws?		No.		No.
	Board of directors and audit committee:
	Does the board of directors and its major committees contain an appropriate number of “independent” directors?		Yes. The Board of Directors is composed of 5 senior members of management and 4 independent board members.		No.
	Are there regular meetings of the board of directors (or comparable bodies) to set policies and objectives, review the entity’s performance, and take appropriate action, and are minutes of such meetings prepared and signed on a timely basis?		Yes. The Board of Directors meet quarterly to review EarthWear’s performance, or when events occur or transactions take place that significantly affects the company. The Corporate Secretary prepares minutes of these meetings within one week and the Secretary signs them after approval of the Board.		No.
	Does the board of directors insure that the overall operations of the entity insure that management’s objectives are congruent with other major stakeholders (e.g., investors and creditors)?		Yes.		No.
	Does an audit committee exist? If so, is the audit committee composed of “independent” directors?		Yes. The audit committee is composed of two directors of the company who are not members of management.		No.
	Does the audit committee adequately assist the board in maintaining a direct line of communication with the entity’s external and internal auditors?		Yes. The audit committee also meets with the internal and external auditors each quarter.		No.
	Does the audit committee have adequate resources and authority to discharge its responsibilities?		Yes.		No.
	Is this evidenced by · Regular meetings? · The appointment of qualified members? · Minutes of the meetings?		The audit committee meets quarterly just prior to the board of directors meeting and minutes are maintained of each meeting. Both members of the audit committee have substantial financial experience.		No.
	Does the entity set entity wide objectives that state what the entity desires to achieve, and are they supported by strategic plans?		Yes.		No.
	Does the entity have a risk analysis process that includes estimating the significance of the risks, assessing the likelihood of their occurring, and determining the actions needed to respond to the risks?		Yes.		No.
	Does the entity have mechanisms to identify and react to changes that may dramatically and pervasively affect the entity?		Yes.		No.
	Does management have clear objectives in terms of budget, profit, and other financial and operating goals?		Yes.		No.
	Are such objectives		Yes.		No.
	· Clearly written?
	· Actively communicated throughout the entity?
	· Actively monitored?
	Does the appropriate level of management		Yes.		No.
	· Adequately investigate variances?
	· Take appropriate and timely corrective actions?
	Has management established procedures to prevent unauthorized access to, or destruction of, documents, records, assets, programs, and data files?		Yes.		No.
	Organizational structure:
	Is the organization of the entity clearly defined in terms of lines of authority and responsibility?		Yes. The company has clear lines of authority among the various operating departments and staff functions.		No.
	Are controls for authorization of transactions established at an adequately high level?		Yes.		No.
	Are such controls adequately adhered to?		Yes.		No.
	Is the organizational structure appropriate for the size and complexity of the entity?		Yes.		No.
	Has management established policies for developing and modifying accounting systems and control activities?		Yes.		No.
	Are accounting and data processing centralized or decentralized?		Yes. All information technology is centralized.		No.
	Assignment of Authority and Responsibility:
	Is there clear assignment of responsibility and delegation of authority to deal with such matters as organizational goals and objectives, operating functions, and regulatory requirements?		Yes. The human resources department maintains detailed job descriptions, including specific duties and reporting responsibilities. Management has reviewed these job descriptions for proper assignment and delegation of authority.		No.
	Are employees’ job responsibilities, including specific duties, reporting relationships, and constraints, clearly established and communicated to employees?		Yes.		No.
	Has management clearly communicated the scope of authority and responsibility to data processing management?		Yes.		No.
	Does adequate computer systems documentation indicate the controls for authorizing transactions and approving systems changes?		Yes.		No.
	Is there adequate documentation of data processing controls?		Yes.		No.
	Communications:
	Does management communicate employees’ duties and control responsibilities in an effective manner?		Yes.		No.
	Does communication flow across the organization adequately to enable people to discharge their responsibilities effectively?		Yes.		No.
	Does the entity have a performance measurement system?		Yes. The company manages performance through a business plan and a strong budgeting process. Senior management meet at least monthly to discuss the budget and corporate performance.		No.
	If so, what key performance indicators (KPIs) are used by management to measure performance?		Inventory Turnover, Gross Profit Percentage, Days of Inventory on hand, Return on Assets, Return on Equity
	Does the entity benchmark its performance against its industry and major competitors?		Yes.		No.
	Does the entity consider financial analysts’ research and earnings reports?		Yes.		No.
	Does the information system give management the necessary reports on the entity’s performance relative to established objectives, including internal and external information?		Yes.		No.
	How often are performance reports prepared?		Yes.		No.
	Is the information provided to the right people in sufficient detail and in time to enable them to carry out their responsibilities?		Yes.		No.
	Are communication channels established for people to report suspected improprieties?		Yes.		No.
	Does the entity have an internal audit function?		Yes.		No.
	Are recommendations made by the internal and external auditors implemented?		Yes.		No.

Answer rating: 100% (QA)

Risk Factors DescriptionResponse Any Remaining Risk What are the entitys major sources of revenue including the nature of its products andor services EarthWear Clothiers Inc is a retail clothing compa... View the full answer