Scenario Assignments

Running head: SCENARIOS ASSIGNMENTS

Scenarios Assignments

Under Armour Inc. generates its revenue by selling performance gear ranging from apparel, footwear and accessories for women, men and youth. Under Armour owns several storefronts and websites where their brand it also being sold to customers who reside mostly in North America, but is readily available to others all around the globe. The company sells their products through wholesale as well to national, regional and other independent specialty retailors, which generates the net revenues for the company. Unaffiliated manufacturers that operate out of 18 countries outside of the United States manufacture products at Under Armour. Based on additional research of their Form 10-K, Under Armour reported that 67% of sales were generated through apparel sales, 21% from footwear and 8% from accessories.

General Audit Concerns

Before our firm completes the audit on Under Armour, we must address general concerns involving the background of the business and an adequate time frame to audit the client. Our team will need to review all financial statements and reports submitted by the client. These include balance sheets, income statements, and statement of cash flow, stockholder’s equity and annual reports to determine how profitable the business is. This review of statements will give the firm an idea of how profitable the company is. We will also need to ensure that the company is following all guidelines put in place by GAAP and FASB, which will serve as our evidence. Our firm will also review the legal proceedings against the company. Our firm needs to be aware of ay litigation issues concerning Under Armour as it may affect our firm’s reputation depending on the severity of the cases. Our firms must also have an understanding of the client’s business and its internal controls. Included in these operations are the industry and external environment, management and governance, strategies and objective, business operations and processes and measurement and performances. The better understanding of how the business functions will allow us to provide a thorough audit and give more accurate opinion at the end. Given all the factors up for review and the amount of auditors in our team, we should be looking at approximately 1-2 months to provide Under Armour with a thorough and adequate audit.

General Business Concerns

Under Armour has not merged any of their business with any merger. The company has concerns surrounding development of products for customers, managing their investments, keeping up with competitors and avoiding a decline in sales. The business offers different types of good in the category of apparel, accessories and footwear for men, women and youth. The company specializes in performance and offers many performance-enhancing products such as the HEATGEAR, COLDGEAR and ALLSEASONGEAR. The business operates conglomerate with many types of goods and services along with sites made available for its consumers and retail stores all around the world, which is available to customers as well. The main fabric used in the production of these products is cotton, which is subject to price fluctuations due to its supply shortages around the world. Other raw materials used (chemicals and petroleum based components) are also subject to supply shortages, which also result in price fluctuations. Under Armour leases 241 properties outside of the United States including Mexico, Brazil, China, Canada, Chile, Netherlands, and Amsterdam since 2016. Operations in these countries flow without an issue and the company would like to extend these leases over time. The competition is intense with competitors such as Nike, Adidas who sell very similar products. Competition for Under Armour includes selling space, products, advertising, media and much more. Top Management in the company has not been changed. The CEO has been Kevin Plank since 1996 when the company was founded. He is also a member of the board of directors for the same amount of time. Seasonality is not a factor in the company because they sell products that are appropriate for each season. They have specific brands pointing to a season such as COLD GEAR for cold and HEAT GEAR for warm weather and ALLSEASONGEAR for both. Their footwear is available for all seasons as well depending on the sport being played. The revenue tends to be higher in the Fall season with sales of the cold weather products and higher customer sales.

Ethics and Legal Issues

The company has a written code of ethics and business conduct that is available to ever employee. These rules are for everyone including the top management, controller and officers. The company has been involved in litigation and other proceedings. Under Armour was audited by PwC in December of 2013. Under Armour reportedly have no auditing or accounting issues. After review of the Definitive Proxy Statement section “Independent Auditors”, the auditors report no disputes with PcW CPA firm of independent auditors. The company is susceptible to legal proceedings and litigation. These matters vary from commercial disputes and property, trade and regulatory claims.

Regulatory Compliance Concerns

The company must comply with federal regulations concerning labeling, distribution, importing, marketing and product sales because of the type of products that are manufactured and distributed by Under Armour. Under Armour may face penalties and product recall if they fail to comply with the federal regulations put in place. Under Armour’s employees do not have a collective bargaining contract because of its belief of a good relationship between management and hourly employees. The company does not have a history of labor related stoppage. The company has a great history of being compliant with the Sarbanes Oxley and other regulatory rules.

1. CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

	Under Armour	Nike

Current Asset	$ 1,965,153.00	$ 15,025,000.00
Current Liabilities	$ 685,816.00	$ 5,358,000.00

Current Ratio	2.87	$ 2.80

Analysis:
The current ratio helps the creditors and investors to understand the liquidity of a company and how easily they will be able to pay off their current liabilities. This ratio expresses a firm’s current debt in terms of current assets. So, the current ratio of Under Armour has 2.87 means that the company has 2.87 times more current assets than current liabilities while Nike has 2.80 current ratio which they have 2.80 times more current assets than current liabilities. A higher current ratio is always favorable than a lower current ratio because it shows the company can more easily make current debt payment. The current ratio also sheds light on the overall debt burden of the company.




2. INVENTORY TURNOVER = COST OF GOOD SOLD / AVERAGE INVENTORY

COGS	$ 2,584,724.00	$ 17,405,000.00
Average Inventory	$ 917,491.00	$ 4,838,000.00

Inventory Turnover	$ 2.82	$ 3.60

Analysis:
Inventory turnover is a measure of how efficiently a company can control its merchandise. It shows that the company did not over spend of buying too much inventory and waste them by storing them as non-salable inventory. Nike has 3.60 inventory turnover while Under Armour has 2.82 only, means Nike sells more than Under Armour. This is not good to see for the investors and creditors because investors and creditors are interested on how to liquefy a company’s inventory as it is often put up as a collateral for loans.





3. DEBT EQUITY RATIO = DEBT / EQUITY

Debt	$ 817,388.00	$ 2,010,000.00
Equity	$2,030,900.00	$ 12,258,000.00

Debt Equity Ratio	0.4	0.16

Analysis:
A debt to equity ratio of 1 would mean that investors and creditors have an equal stake in the business assets. A lower debt to equity ratio usually implies a more financially stable business. Under Armour has 0.4 debt equity while Nike has 0.16; it shows here that Nike is more stable than Under Armour. It is too obvious that investors and creditors would prefer to invest from Nike because of a lower debt equity ratio. Under Armour has a higher debt to equity ratio and will be considered riskier to invest. Materiality – As an auditor I will want to make sure all matters that are important are disclosed and determine if they are material items. I will want to make sure when examining materiality that the intentions and purpose for the audience of the financial statements as a whole. The steps I will be following when applying materiality is that I will want to make sure that I do not take separate parts for the materiality but as a whole and determining the performance level. The next three steps will be to in each segment estimating the misstatement and combined misstatement and comparing final results with estimation. Misstatement – One of my task as an auditor is detecting and recording the two different types of misstatements. The first type is known misstatement is when I can identify the misstatement and the amount. I may see known misstatements in the reporting section of the PPE portion of the statements. Likely misstatements can be more in-depth because I will be dealing with matters of opinions of between management and the auditor (myself). I might run into some likely misstatements when auditing the uncollectable accounts. Another likely misstatement could be an error in my test samples. Audit Risk – As an auditor I can never assume the financial statements are correct or the evidence is presented correctly to us. I have to assume and accept there could be some level of risk. Performing an audit risk, I am making sure that I have reasonable assurance that the financial statements are free of any misstatements based on expressing my opinion on my findings. I do not want the company to be at risk and therefore will conduct testing and my reporting will be based on a risk-free audit. Audit Risk Model – The audit risk model is a key formula for auditors to determine what types of evidence and how much or each audit project. Audit risk model also can help identify any misstatements. There are components that form an audit risk model: inherent risk, control risk, and detection risk. Control risk helps assess the internal controls to make sure the organizations are adequate and be able to detect any fraud instances. Detection risk is when the auditors fail at detecting any misstatements from the financial statements. I can reduce this risk by running detailed testing on my sample transactions. Inherent Risk – When assessing inherent risk, I must remember this is the most important concept when I am auditing. I will be predicating where misstatements could be found and reported. When assessing inherent risk, there are several major factors I need to remember. They are the following; Nature of the client’s business, Results from previous audits, Initial versus repeat engagement, Related parties, Complex or Non-routine Transactions, Judgment Required to correctly record account balances and transactions, Makeup of the population, and Factors related to fraudulent financial reporting and misappropriation of assets. These major factors are key ingredients on how the company is function and reporting on their financial statements. Relationship of Risk to Audit Evidence – The relationship between of risk and audit evidence is important to my reporting of the financial statements. As an auditor, I have to make sure the evidence presented to me from the client is truthful and reported correctly. Poor evidence could lead to misstatements in the financials and for myself and audit team assessing audit risk within company and statements. I must and the audit team must have thorough testing and understanding of the client’s financial statements. Risk Assessment Procedures are collective, procedures to obtain understanding of the entity and its environment, including internal controls, represent the auditor's risk assessment procedures; Performed to assess the risk of material misstatement in the financial statements; a major part of the auditor's risk assessment procedures are done to obtain an understanding of internal control. Tests of Controls is the auditor's understanding of internal controls is used to assess control risk for each Transaction-related audit objective. Substantive Tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances; Substantive tests of transactions are used to determine whether all six transaction related audit objectives have been satisfied for each class of transactions. Analytical Procedures are comparisons of recorded amounts to expectant developed by the auditor; must be done during a planning and completing the audit; two most important purposes of analytical procedures in the audit of account balances are to indicate possible misstatements and provide substantive evidence. Tests of Details of Balance is the focus on the ending general ledger balances for both balance sheet and income statement accounts; emphasis is mostly on the balance sheet; help establish the monetary correctness of the accounts they relate to and therefore are substantive test; the extent of these tests depends on the results of tests of controls, substantive test transactions, and substantive analytical procedures. For our company Under Armour Risk Assessment, Test Controls and Analytical procedures would be best suited for our company. The reason why I say Risk Assessment is because when performing an audit, you would use risk assessment procedures to assess the risk that material misstatement exists. Also, because risk assessment procedures are used to determine the need for other types of audit tests in response to the risk assessment results, risk assessment procedures should always be included in audit testing. The second one that would be Test Controls. There are a variety of different types of test controls that can be put into five categories, and they are Authorization, Performance Reviews, Information Processing, Physical and Segregation of Duties. The test Controls main point of the test is to see if a control functions properly, so the dollar amount of a transaction is not of consequence to the goal of the test. This type of test looks at the internal controls and associated risks associated with transaction-related objectives. This may include testing samples of transactions to determine if controls were effective in the particular sample set. Also, Analytical procedures would test to see if plausible and expected relationships exist in both financial and nonfinancial data. We would compare current financial figures to the same figures in the prior year. Analytical procedures can be used to determine the possibility of misstatements in account balances. Because of the complex nature of the company's inventory accounts and operations and the associated risk involved in the industry as it relates to inventory, analytical procedures would be appropriate in determining the extent to which tests of details of balances would be needed. Because risk assessment procedures are used to determine the need for other types of audit tests in response to the risk assessment results, risk assessment procedures should always be included in audit testing.
References Arens, A. A., Elder, R. J., & Beasley, M. S. (2013). Auditing and assurance services: An integrated approach (15th ed.). Retrieved from The University of Phoenix eBook Collection database. http://investor.underarmour.com/secfiling.cfm?filingID=1336917-17-17&CIK=1336917 https://www.sec.gov/Archives/edgar/data/1336917/000119312513110352/d478371ddef14a.htm#toc http://www.uabiz.com/compliance.cfm