Newham Company is a publicly-traded company operating in the personal product industry. Newham manufactures cosmetic and body-care
Question:
Newham Company is a publicly-traded company operating in the “personal product” industry. Newham manufactures cosmetic and body-care products. These products are sold to large department chain stores, such as Target and Walmart, to be sold and distributed to the final consumer. Competitors include Revlon, Inc. (REV – NYSE) and Avon Products, Inc. (AVP - NYSE). Newham Company has experienced steady growth over the past several years. Recently, there has been a change in executive management, including the CEO and CFO. The change was sparked by questionable bonus payments that were paid to the executive management team based on the company’s performance. In addition, a recent lawsuit has been filed based on claims that a new product was not properly advertised, leading many customers to experience allergic reactions.
Of the 213 sales transactions examined, 82 “deviations” were identified:
No credit approval was found on 42 sample items
The wrong quantity billed was identified on five sample items
There was a mathematical error on 10 sample items
No shipping document could be located for 25 sample items
Following are the procedures used:
1. We randomly chose the sample of 216 transactions across the year with 18 from each calendar month.
2. All of the invoices in the sample were found. None were missing.
3. All of the invoices were properly posted to the general ledger sales and accounts receivable control accounts, and each was posted to the right customer’s individual account.
Newham, Inc. | |||||||
Trial Balances for years ending December 31, 2013, 2014 and 2015 | |||||||
Account Description | 2013 | 2014 | $ Change | %Change | 2015 | $ Change | %Change |
Cash on Hand | $ 2,400 | $ 2,548 | $ 148 | 6% | $ 2,599 | $ 51 | 2% |
Regular Checking Account | 747,000 | 553,960 | (193,040) | -26% | 643,802 | 89,842 | 16% |
Payroll Account | 1,025 | 860 | (165) | -16% | 945 | 85 | 10% |
Accounts Receivable | 513,000 | 697,092 | 184,092 | 36% | 942,528 | 245,436 | 35% |
Allowance for Doubtful Accounts | (78,525) | (87,691) | (9,166) | 12% | (42,552) | 45,139 | -51% |
Inventory | 1,531,507 | 1,585,734 | 54,227 | 4% | 1,599,078 | 13,344 | 1% |
Prepaid Insurance | 9,143 | 8,305 | (838) | -9% | 7,722 | (583) | -7% |
Office Supplies | 259 | 565 | 306 | 119% | 982 | 417 | 74% |
Land | 846,250 | 846,250 | - | 0% | 846,250 | - | 0% |
Buildings and Land Improvements | 759,882 | 771,882 | 12,000 | 2% | 771,882 | - | 0% |
Office Equipment and Furniture | 841,521 | 580,589 | (260,933) | -31% | 595,169 | 14,580 | 3% |
Accum. Depreciation | (423,800) | (351,643) | 72,157 | -17% | (355,433) | (3,791) | 1% |
Other Noncurrent Assets | 250 | 250 | - | 0% | 250 | - | 0% |
Accounts Payable | (791,397) | (488,867) | 302,530 | -38% | (450,648) | 38,219 | -8% |
Wages Payable | (36,838) | (54,513) | (17,675) | 48% | (8,145) | 46,368 | -85% |
Accrued Liabilities | (1,648) | (1,452) | 196 | -12% | (1,546) | (94) | 6% |
Line of Credit | (25,000) | (23,250) | 1,750 | -7% | (35,690) | (12,440) | 54% |
Common Stock | (1,531,250) | (1,531,250) | - | 0% | (1,531,250) | - | 0% |
Paid-in Capital | (1,278,750) | (1,278,750) | - | 0% | (1,278,750) | - | 0% |
Retained Earnings | (796,136) | (1,087,041) | (290,905) | 37% | (1,232,634) | (145,593) | 13% |
Sales | (1,984,641) | (1,620,560) | 364,081 | -18% | (2,064,809) | (444,249) | 27% |
Sales Returns | 12,979 | 32,347 | 19,368 | 149% | 23,096 | (9,251) | -29% |
Warranty Expense | 3,753 | 7,104 | 3,351 | 89% | 4,481 | (2,623) | -37% |
Cost of Goods Sold | 856,326 | 640,300 | (216,026) | -25% | 791,035 | 150,735 | 24% |
Freight | 8,689 | 9,095 | 406 | 5% | 5,068 | (4,027) | -44% |
Advertising Expense | 12,425 | 15,125 | 2,700 | 22% | 17,507 | 2,382 | 16% |
Auto Expenses | 6,218 | 5,763 | (455) | -7% | 4,713 | (1,050) | -18% |
Depreciation Expense | 26,250 | 72,157 | 45,907 | 175% | 33,791 | (38,366) | -53% |
Warehouse Salaries | 91,730 | 94,802 | 3,072 | 3% | 96,792 | 1,990 | 2% |
Legal and Professional Expense | 6,417 | 5,113 | (1,304) | -20% | 3,406 | (1,707) | -33% |
Bad Debt Expense | 8,032 | 7,569 | (463) | -6% | 3,800 | (3,769) | -50% |
Insurance Expense | 6,428 | 5,085 | (1,343) | -21% | 5,774 | 689 | 14% |
Maintenance Expense | 5,420 | 6,220 | 800 | 15% | 7,629 | 1,409 | 23% |
Utilities | 9,554 | 7,855 | (1,699) | -18% | 5,600 | (2,255) | -29% |
Phone | 5,467 | 8,911 | 3,444 | 63% | 5,651 | (3,260) | -37% |
Postal | 642 | 740 | 98 | 15% | 360 | (380) | -51% |
Miscellaneous Office Expense | 1,279 | 3,879 | 2,600 | 203% | 25,390 | 21,511 | 555% |
Payroll Tax Exp | 97,151 | 87,840 | (9,311) | -10% | 86,672 | (1,169) | -1% |
Retirement Plan Ex | 75,000 | 60,000 | (15,000) | -20% | 63,000 | 3,000 | 5% |
Rent or Lease Expense | 54,357 | 51,363 | (2,994) | -6% | 53,705 | 2,342 | 5% |
Administrative Wages Expense | 394,024 | 344,399 | (49,625) | -13% | 336,566 | (7,833) | -2% |
Interest Expense | 2,000 | 1,860 | (140) | -7% | 1,860 | - | 0% |
Income Tax Expense - Federal | 6,250 | 4,240 | (2,010) | -32% | 9,540 | 5,300 | 125% |
Income Tax Expense - State | 3,345 | 3,200 | (145) | -4% | 2,800 | (400) | -13% |
Based on an auditor’s experiences and knowledge of accounting, finance, and common errors or pitfalls, it is common for an auditor to provide recommendations. The sample audit program addressed here is merely a small sample, not a comprehensive program. Thus, recommendations for further risk analysis, sample methods, and other concerns should be offered. In your report of recommendations to the head of the new audit team, include the following sections:
o Explanation of findings in the risk analysis
o Sarbanes–Oxley concerns or requirements
o Recommendations on appropriate sampling methods
o Recommendations for preparation and success in the external audit
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe