ASSIGNMENT
Target and Kohl’s are chains of stores that cater to customers who desire name-brand goods at lower prices. The Securities and Exchange Commission (SEC) Form 10-K filing rules require management of U.S. public companies to include background information about the business, as well as the most recent financial condition and results of operations. Access each company’s most recent Form 10-K. These can be obtained through the SEC website (www.sec.gov), or directly from the investor relations section of the Target (www.target.com) and Kohl’s (www.kohls.com) websites.
a. Read the description of each company’s business in Part I, Item 1 of Form 10-K. Evaluate the similarity of each company as a basis for making financial comparisons.
b. Each company follows what is called a 52/53-week year in which the fiscal year ends on the Saturday nearest January 31. Given the nature of these companies, why does a year end near January 31 make sense? Note that most public companies have a December 31 year end.
c. Use the financial statements included in Part II, Item 8 to calculate the gross margin percentage and inventory turnover ratio for each company for the most recent year.
Which company has the higher gross margin percentage? Which company has the higher inventory turnover?
d. Evaluate whether the relation between the gross margin percentage and inventory turnover makes sense given the description of each company’s business.
You are evaluating audit results for assets in the audit of Roberts Manufacturing. You set the preliminary judgment about materiality at $50,000. The ac- count balances, performance materiality, and estimated overstatements in the accounts are shown next.
Account
Account
Balance
Performance
Materiality
Estimate of Total
Overstatements
Cash $ 50,000 $ 5,000 $ 1,000
Accounts receivable 1,200,000 30,000 20,000
Inventory 2,500,000 50,000 ?
Other assets 250,000 15,000 12,000
Total $4,000,000 $100,000 ?
a. Assume you tested inventory amounts totaling $1,000,000 and found $10,000 in overstatements. Ignoring sampling risk, what is your estimate of the total misstatement in inventory?
b. Based on the audit of the assets accounts and ignoring other accounts, are the overall financial statements acceptable? Explain.
c. What do you believe the auditor should do in the circumstances?
