Cloud 9 - Continuing Case

Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.

Required

1. a. Based on your conclusions from the case study questions in previous chapters (particularly Chapters 3, 4, and 8), complete the following worksheet to determine the risk of material misstatement (RMM) and the acceptable detection risk (DR).

   Account Assertion	Inherent Risk	Control Risk	Risk of Material Misstatement	Detection Risk
   Salesyoccurrence
   Salescompleteness
   Trade receivablesexistence
   Trade receivablescompleteness
   Cashexistence
   Cashcompleteness

2. b. Scan the line items on the prior-year financial statements and the current-year trial balance for Cloud 9. Using your knowledge of financial accounting, identify line items that require estimates or fair value measurements. For each item, state whether estimation uncertainty is low or high and briefly explain why.

CASE BELOW:

Financial Information

Cloud 9 set a goal to increase revenue by 3% for the 2022 fiscal year. One of the critical success factors for the company to achieve this 3% increase is to grow its share of the U.S. footwear market. However, with the new store opening and the subsequent increase in costs, as well as the costs related to the sponsorship deals, the management team is projecting a decline in earnings for the year.

In addition, to build customer loyalty and promote sales in the retail store, Cloud 9 introduced a loyalty program whereby customers earn one point for every $10 that they spend. Customers can then redeem points by going online to receive coupons that can be exchanged for merchandise in the store. On August 1, 2022, the company took out an additional loan of $7 million with Windsor Bank to help fund the store costs and to purchase additional delivery trucks and vans. This loan is repayable over five years. The company's other debt relates to loans issued more than five years ago from various lending institutions.

All inventory is purchased in U.S. dollars, which the company acquires under forward exchange contracts. The company provides a 12-month warranty on all footwear. Historical claims have been 0.2% of total sales.

The most recent financial statements for Cloud 9 are as follows. (Note that these financial statements are also available in Excel format in WileyPLUS.)

Cloud 9 Consolidated Statement of Income
	For the year ended January 31, 2022		For the year ended January 31, 2021
Revenues		$364,953,846		$345,965,385
Costs and expenses:
Cost of sales	$222,496,154		$207,838,462
Selling and administrative	104,450,000		100,246,154
Interest expense	1,257,692		1,730,769
Other (income)/expense, net	1,311,539		796,154
Total costs and expenses		329,515,385		310,611,539
Income before income taxes		35,438,461		35,353,846
Income taxes		12,757,692		13,080,769
Net income		$ 22,680,769		$ 22,273,077

Cloud 9 Consolidated Balance Sheet
	January 31, 2022		January 31, 2021
Assets
Current assets:
Cash and cash equivalents	$11,692,308		$9,780,769
Accounts receivable, less allowance for doubtful accounts of $2,773,077 and $2,515,385	62,361,538		60,361,539
Inventory	54,773,077		55,615,385
Investments (derivatives)	14,460,577		14,852,885
Deferred income taxes	3,357,692		3,288,461
Prepaid expenses and other current assets	5,250,000		7,276,923
Total current assets		$151,895,192		$151,175,962
Property, plant, and equipment, net		62,261,539		60,900,000
Identifiable intangible assets and goodwill, net		3,820,192		3,950,961
Deferred income taxes and other assets		5,853,846		9,238,462
Total assets		$223,830,769		$225,265,385
Liabilities and Stockholders' Equity
Current liabilties:
Current portion of long-term debt	$207,692		$1,926,923
Notes payable	28,896,154		35,546,154
Accounts payable	20,615,385		20,915,385
Accrued liabilities	18,157,692		23,336,581
Income taxes payable	842,308		582,650
Total current liabilities		$ 68,719,231		$ 82,307,693
Long-term debt		16,765,384		18,088,462
Deferred income taxes and other liabilities		3,942,308		4,253,846
Stockholders' equity:
Common stock at par value	107,692		107,692
Capital in excess of par value	17,669,231		14,192,308
Unearned stock compensation	(380,769)		(450,000)
Accumulated other comprehensive income	(5,850,000)		(4,273,077)
Retaining earnings	122,857,692		111,038,461
Total stockholders' equity		134,403,846		120,615,384
Total liabilties and stockholders' equity		$223,830,769		$225,265,385

Cloud 9 Condensed Cash Flow Statement
	For the year ended
	January 31, 2022	January 31, 2021
Cash provided by operations	$25,250,000	$26,907,692
Cash used by investing activities	(13,165,385)	(16,923,077)
Cash used by financing activities *	(13,457,692)	(9,696,154)
Effect of exchange rate changes on cash	3,284,616	1,873,077
Net increase in cash and cash equivalents	1,911,539	2,161,538
Cash and cash equivalents, beginning of year	9,780,769	7,619,231
Cash and cash equivalents, end of year	$11,692,308	$9,780,769

^*Includes dividends paid of $4,988,462 in 2022 and $5,119,231 in 2021.

Cloud 9 Trial Balance
	October 31, 2022		October 31, 2021
	Debit	Credit	Debit	Credit
Cash and cash equivalents	$13,446,154		$6,123,884
Accounts receivable	70,485,625		64,867,910
Allowance for doubtful accounts		$704,856		$648,679
Inventory	55,100,000		57,900,000
Investments (derivatives)	13,419,231		13,805,769
Deferred income taxes (current)	2,857,692		3,584,615
Prepaid expenses and other current assets	9,265,385		6,446,154
Property, plant, and equipment	103,803,846		97,576,923
Accumulated depreciation		39,761,538		35,207,692
Identifiable intangible assets and goodwill	3,723,007		3,851,923
Accumulated amortization
Deferred income taxes and other assets (noncurrent)	9,557,692		8,410,849
Current portion of long-term debt		2,115,385		300,125
Notes payable		21,376,923		34,823,077
Accounts payable		14,986,457		22,561,538
Accured liabilities		25,803,846		24,150,000
Income taxes payable		2,211,539		3,726,923
Long-term debt		23,661,538		17,119,106
Deferred income taxes and other liabilities (noncurrent)		4,915,384		4,330,769
Common stock at par value		111,538		107,692
Capital stock in excess of par value		19,415,385		16,484,615
Unearned stock compensation	253,846		480,769
Accumulated other comprehensive income	5,011,538		4,746,154
Beginning retained earnings		122,857,692		98,150,473
Dividends	3,866,838		3,299,423
Repurchases of common stock	4,627,381		2,939,393
Revenue		277,338,461		269,442,308
Cost of sales	169,346,154		163,003,846
Selling and administrative	79,092,308		78,246,154
Interest expense	1,438,461		1,773,077
Other expense	453,846		757,692
Income tax expense	9,511,538		9,238,462
Totals	$555,260,542	$555,260,542	$527,052,997	$527,052,997