The following information was obtained from several accountingand auditing enforcement releases issued by the Securities and Exchange Commission(SEC) after its investigation of fraudulent financial reporting involving Just for Feet, Inc.:Just for Feet, Inc., was a national retailer of athletic and outdoor footwear and apparelbased in Birmingham, AL. The company incurred large amounts of advertisingexpenses and most vendors offered financial assistance through unwritten agreementswith Just for Feet to help pay for these advertising expenses. If Just for Feet promoted aparticular vendor’s products in one of its advertisements, that vendor typically wouldconsider agreeing to provide an “advertising co-op credit” to the Company to share thecosts of the advertisement. Just for Feet offset this co-op revenue against advertisingexpense on its income statement, thereby increasing its net earnings. Although everyvendor agreement was somewhat different, Just for Feet’s receipt of advertising co-oprevenue was contingent upon subsequent approval by the vendor. If the vendorapproved the advertisement, it would usually issue the co-op payment to Just forFeet in the form of a credit memo offsetting expenses on Just for Feet’s merchandisepurchases from that vendor. During fiscal year 1998, the company’s CFO, controller,and VP of Operations directed the Company’s accounting department to book co-opreceivables and related revenues that they knew were not owed by certain vendors,including Asics, New Balance, Nike, and Reebok. These fraudulent practices resultedin over $19 million in fictitious pretax earnings being reported, out of total pretaxincome of approximately $43 million. The SEC ultimately brought charges against anumber of senior executives at Just for Feet and some vendor representatives.1. What does it mean to approach an audit with an attitude of professional skepticism?2. What circumstances related to the accounting treatment of the vendor allowancesshould increase an auditor’s professional skepticism?3. What factors might have caused the auditor to inappropriately accept the assertionsby management that the vendor allowances should be reflected in the financialstatements?4. Develop three probing questions related to the vendor allowances that the auditorshould have asked in the audit of Just for Feet’s financial statements.
The following information was obtained from several accounting
and auditing enforcement releases issued by the Securities and Exchange Commission
(SEC) after its investigation of fraudulent financial reporting involving Just for Feet, Inc.:
Just for Feet, Inc., was a national retailer of athletic and outdoor footwear and apparel
based in Birmingham, AL. The company incurred large amounts of advertising
expenses and most vendors offered financial assistance through unwritten agreements
with Just for Feet to help pay for these advertising expenses. If Just for Feet promoted a
particular vendor’s products in one of its advertisements, that vendor typically would
consider agreeing to provide an “advertising co-op credit” to the Company to share the
costs of the advertisement. Just for Feet offset this co-op revenue against advertising
expense on its income statement, thereby increasing its net earnings. Although every
vendor agreement was somewhat different, Just for Feet’s receipt of advertising co-op
revenue was contingent upon subsequent approval by the vendor. If the vendor
approved the advertisement, it would usually issue the co-op payment to Just for
Feet in the form of a credit memo offsetting expenses on Just for Feet’s merchandise
purchases from that vendor. During fiscal year 1998, the company’s CFO, controller,
and VP of Operations directed the Company’s accounting department to book co-op
receivables and related revenues that they knew were not owed by certain vendors,
including Asics, New Balance, Nike, and Reebok. These fraudulent practices resulted
in over $19 million in fictitious pretax earnings being reported, out of total pretax
income of approximately $43 million. The SEC ultimately brought charges against a
number of senior executives at Just for Feet and some vendor representatives.
1. What does it mean to approach an audit with an attitude of professional skepticism?
2. What circumstances related to the accounting treatment of the vendor allowances
should increase an auditor’s professional skepticism?
3. What factors might have caused the auditor to inappropriately accept the assertions
by management that the vendor allowances should be reflected in the financial
statements?
4. Develop three probing questions related to the vendor allowances that the auditor
should have asked in the audit of Just for Feet’s financial statements.
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