9:52 Audit Planning Memo (1) - Read-only GA . . . Sign in to edit and save changes to this file. V EarthWear's Debt to Equity V B development over one allu relation to the industry as a whole. Tillally, tus secuon may conclude witt an mal 10 assessment of the company as a going concern 12 BACKGROUND INFORMATION 13 . Business Strategy and Target Customers EarthWear Clothiers generates revenue mainly through the sale of high quality clothing for outdoor sports, such as hiking, skiing, fly-fishing, and white-water kayaking. The company's product lines also include casual clothes, accessories, shoes, and soft luggage. The company's key customers are the 18.8 million persons on its mailing list, approximately 6.8 million of whom are viewed as "current customers" because they have purchased from the company in the last 24 months. Market research as of January 2021 indicates that approximately 50 percent of customers are in the 35-54 age group and had a median income of $62,000. Almost two-thirds are in professional or managerial 14 positions. 16 Suppliers Address at least two key points about issues relating to EarthWear Clothiers' suppliers. Keep in mind that the points you identify should have important implications for understanding EarthWear as an audit client. 19 Competition Address at least two key points about EarthWear Clothiers' competitors or the mail order clothing industry. Keep in mind that the points you identify should have important implications for understanding EarthWear as 20 Lan audit client. 22 . Social Factors 23 The company's results can be affected by changing fashion trends . 25 . Analytical Procedures "Days Outstanding in Accounts Receivable is 3.09 and the industry average is 14.10. This ratio indicates that EarthWear collects on sales much more quickly than the rest of the industry. It also represents a significant improvement relative to prior years for EarthWear and is better than expected for this year. This ratio is consistent with a relatively low allowance for doubtful accounts. Controller explains that fast collection rate is a result of increased focus on collection activities and newly implemented incentives for early payment. We will corroborate the client's explanation as a part of our testing in the sales & collection cycle. 26 27 Analyze 4 additional analytical procedures that were completed in the planning process. 28 29 EarthWear's Quick Ratio is 0.73 and the industry average is 0.80 Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or 30 your planned audit procedures. 31 32 EarthWear's Inventory Turnover is 3.88 and the industry average is 6.20 Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or 33 your planned audit procedures. 34 35 EarthWear's Gross Profit Percentage is 43.90% and the industry average is 38.80% Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or 36 your planned audit procedures. 37 38 O FarthWear's Deht to Fruity ratio is 0 50 and the industry average is 0 84 Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit of 39 your planned audit procedures. 40 41 INTERNAL CONTROL ENVIRONMENT In this section, the auditors will discuss the control environment, including company-level controls. Prior audit results pertaining to the control environment may also be reported, in addition to the amount of control reliance expected 42 throughout the audit 43 44 AUDIT SCOPE CONSIDERATIONS Typically, in this section the auditors will discuss the scope of the procedures to be performed. Materiality for the audit and tolerable misstatement for accounts or business processes will be established. These scoping decisions will affect ME audit program preparation at a more detailed level. For example, tolerable misstatement will affect sample sizes ... . -. . 11I O10:01 Audit Planning Memo (2) - Read-only GA . . . Sign in to edit and save changes to this file. V fx B C D E G H J K EARTHWEAR CLOTHIERS 3-6 Ratio Analyses SAA December 31, 2022 1/3/2023 2018 2019 2020 2021 2022 2022 Differenc Industry (Audited (Audited (Audited (Audited Expecte Actual e from Difference Expected Average (from SHORT-TERM LIQUIDITY RATIOS 9 10 current assets / current liabilities 11 ......!. 12 iquid assets / current liabilities 13 Operating Cash FORM. ................. 14 ....NA cash flow from operations / current liabilities 15 16 ACTIVITY RATIOS: 17 18 net sales / net ending receivables 19 20 365 days / receivables turnover 21 22 ....2.. cost of sales / inventory 23 Dave of Inventory. on Hand..... 24 365 / (cost of sales / inventory) 25 26 PROFITABILITY / PERFORMANCE RATIOS: 27 Gross Profit PerCent298.. 28 ..4....4................MIX....................... gross profit / net sales 30 net income / net sales .... ..2...........x.... 31 32 net income / total assets ...................Mix... ..H.. 34 .....20% net income / total owners' equity 35 36 COVERAGE RATIOS: 37 total liabilities / shareholders' investment 40 .....NA (net income + interest expense) / interest expense 41 42 43 Expected values are obtained by using the forecast function in Excel (using the row of data from 2020 and 2021 to obtain the expected value for 2022). 44 Industry Source: Dun & Bradstreet (D&B). The median values of the industry ratios are used for comparison purposes. For ratios not specifically included on D&B. ratios were 45 calculated from average financial statement data provided. 46 47 NIA = not available or could not be calculated from financial data. 48 49 50 The McGraw.Hil Companies, Inc, 2022 51 52 O=0 11I O