Case 1.3 Just For Feet INC.

1) See Attached 2) Large Volume retail stores that carry a large amount of inventory have a number of internal control risks that the can affect the audit planning decisions for the independent auditors. Some internal control risks that are common to a business like this would be theft of inventory, incentives/pressures from management to employees, issues with compliance, and material misstatements. Auditing Standard Number 8, discusses audit risk. Going into the audit, the independent auditors should try and brain storm what potential internal audit risks that they can see that will potentially create a hazard. They should come up with preventive controls. Once they have done that they should look into those areas during the course of the audit.

By having a plan to help and detect control risk, it will definitely be easier to catch material misstatements that might be made, or inventory being understated due to theft. One thing that Deliotte did do right in the course of the engagement was that in the planning stages of the audit, they did assign a greater than normal audit risk.

3) Companies like Just For feet that operate in extremely competitive environments are prone to inherent risks( SAS 300). Inherent risk factors can be: integrity of management, pressures by employees, management experience, susceptibility to misstatement, unusual transactions close to year end, and past history of accounting practices. Public companies are going to feel pressure from valuations and reports that are made by created by financial institutions. Management will inflate earnings, misstate inventory, and use aggressive/borderline illegal accounting practices just to keep the stock price up. The independent audit team should be aware of these risks. A company that could potentially be classified as one that was to have “ high levels of risk” should never be given the benefit of doubt. The financial statements, confirmations, and other key relevant pieces should be looked into and confirmed. In this case there were a few instances where Baker and Barry accepted pieces of information that they should have looked at with a greater eye. If they would have looked at some of the confirmation request with greater details, they could have potentially saved there careers and Deliotte $50M dollars.

4) Below is a list of the top 5 audit risk factors for the Just for Feet 1998 Audit. -­‐Accounting Misstatements

-­‐ Allowance for Inventory Obsolescence

-­‐Booth Income(illegal recognized) -­‐Advertising Co-­‐op receivable credits

-­‐Attitudes of Management / Incentives and Pressures Other factors outside of the top 5:

-­‐Negative Cash Flows -­‐Debt Covenants The accounting misstatements and discrepancies in the financials had to do with the mailed receivable confirmations. They were only able to account for $22M out of the 28.9M of the vendor year-­‐end allowances. Deliotte got a handful of mixed responses from the various vendors. Despite these flaws, Barry and other Deliotte auditors accepted some of the responses that were classified as “non-­‐standard” and confirmed the remaining $16M by Just for Feet. They did not do any real due diligence here and should have not accepted these flaws. Deliotte did test the inventory “ reserve analysis” prepared by the company vice president. The document did have most of the relevant information but did not include inventory styles for which no items had been sold during the previous 12 months. The auditors also discovered a warehouse that had been excluded from the count. Both of these should have been major red flags for Deliotte, instead they chose not to question any personal about this arrangement.

Just for Feet decided to recognize $9M of booth income for the 1998 fiscal year. The work papers did mention this and an analysis that showed the net effect of the relation journal entries was to increase assets with an increase in income. No further analysis was performed by Deliotte to determine the basis of these entries. This was a mistake on the part of the auditors because the income lead to a bogus non-­‐existent $9M booth asset.

Management had an arrogant attitude from the beginning. Harold Ruttenberg came across this way and his son followed in his footsteps. He has requested the fraudulent confirmation files be filled out but some of his vendors. If he would do go to the extent that he did to conceal the misstatement, who knows what else he would ask. Other executives like Adam Gilbrune were guilty of wire and securities fraud and the firm had a handful of other cohorts that were involved. This is something that is out of the auditor’s control, but it is very important to when taking on a client a background check is run and that you get a good vibe executive board.

5) The parties that were involved in Thomas Shines decision to send back false confirmations to Deliotte were Just For Feet, Thomas Shine, Rebook, Stockholders of Just for Feet, Deliotte, and the staff and auditing personal. If I was put in Thomas Shine’s position I do not think that I would have just accepted Don-­‐Alle Ruttenbergs request to send back false confirmations to Deliotte. I would have denied to send back the false confirmation like the handful of other executives that Ruttenberg asked. From an ethical and legal standpoint the risk does not come anywhere near the reward. I would not of second guessed this decision for a second. I also have trouble seeing why Shine even decided to help Ruttenberg. I am going to assume that there might have been some sort of kickback, but if there wasn’t, it was a real senseless and un-­‐ethical on the part of shine and he paid the price by servicing jail time and paying a heavy fine.