Create an audit plan/program

For the project, you are to put together an audit plan for the company of your choosing. Obtain the latest financial statements for your company and use the most recent fiscal period as what your client would assert to you at the beginning of the audit. For example, if you choose a company with a December 31 fiscal year-end, you would probably use 12/31/16 numbers as a current year starting point. Some of the items you could include in your audit plan include, but are not limited to, the following:Documentation of your risk assessments related to the company. This could include risks related to the previous bullet above, risks related to any incentives, fraud, illegal acts, related party transactions, etc, or accounting specific risks related to line items on the company’s financial statements Audit programs documenting risk assessments (inherent and control) for the accounting area this pertains to (i.e. revenues, accounts payable, intangible assets, etc), possible control testwork and substantive procedures to be performed, etc.At the very least, I would think you’d have audit programs for accounts you deem associated with any significant risks and for accounts comprising major parts of company businessREQUIRED: Illustrate the role of big data in performing these audit proceduresA plan for preliminary analytical procedures based on current year and prior year financial statementsThis audit plan/program should be based on Microsoft…No company history is required as I have already completed it. The sample document below is an example based on the company Gamestop
audit_plan_gamestop__final_.docx

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Audit Plan
for
For fiscal year ending January 31, 2015
Team Members:
Adam Kemp
Jorge Araujo
Steven Eldad
ZachWorthen
Erick Verduzco
1
Table of Contents
Understanding the Client
3-5
Company Overview
Company History
Industry
Competitive Conditions
Developments
Corporate Governance
Regulations
Risk Assessment Analytics
6-9
Income Statement
Revenue Details
Gross Profit Details
Balance Sheet
Calculation of Receivables
Risk Assessment
10-15
Significant Risks
• Revenue
• Inventory
• Accounts Receivable
Risks related to business
• Technology
• Litigation
• Goodwill and intangibles
Audit Programs for Significant Accounts
16-18
Revenue
Inventory
Accounts Receivable
Works Cited
19
2
Company Overview
GameStop Corporation is an American retail chain based in Grapevine, Texas who sells new and
pre-owned video games and accessories, electronics, and wireless services. GameStop is the
world’s largest video game retailer, and operates approximately 6,690 retail stores across the
United States, Australia, Canada, and Europe (GameStop 10-K). GameStop generates about 70%
of its sales from U.S. based stores, about 18% from European based stores, and about 12% from
its Australian and Canadian locations combined. GameStop divides its reportable segments into
three main categories: Video Game Brands, Technology Brands, and E-Commerce, which
consists of revenues from its 12 various online retail websites (GameStop 10-K). Since its initial
public offering in 2002 on the New York Stock Exchange, GameStop has acquired and
developed a variety of subsidiaries, which include EB Games, Game Informer, Cricket Wireless,
Micromania, and Kongregate. In addition, GameStop offers both Apple and AT&T resell
products through its Simply Mac and Spring Mobile operations respectively (GameStop 10-K).
GameStop is registered as a Delaware corporation although based in and operated from
Grapevine, Texas.
Company History
GameStop was created by a series of mergers and acquisitions going back to 1984. Babbage’s, a
small hardware and software retailer, was the predecessor of what is now GameStop. Babbage’s
first merged with Software Etc., which created a new entity called NeoStar Retail Group. In
1996, facing declining sales and executive management employment issues, NeoStar was
subsequently purchased by Barnes & Noble in 1999. Barnes & Noble acquired Funco, another
video game retailer in 2000, which was then merged with NeoStar. In December 2000, Funco
was renamed to GameStop as the company prepared to go public. (GameStop.com Company
History). GameStop continued to acquire other video game and technology brands that appeared
to be potentially profitable. In 2005, GameStop purchased Electronic Boutique Games, or EB
Games, and in 2007 GameStop purchased Rhino Video Games, which was originally owned by
Blockbuster. In addition, GameStop acquired Micromania in 2008, Kongegrate in 2010, and
BuyMyTronics in 2012. In addition, GameStop launched a division named GameStop
Technology Institute, which is dedicated to developing and delivering new and innovative
technology products and services to consumers (GameStop.com Company History).Through the
acquisition of a variety of related product companies, GameStop has strengthened and diversified
its position in the video game retail industry.
Industry
According to market research measurements, the video game industry includes new video game
hardware, software, and accessories, and excludes pre-owned video game products in the
calculation of the video game market size. According to International Development Group, the
global market size for new video game products and PC entertainment software was $21.5
billion in 2014, $13.1 billion of which being in the United States. The average age of a video
game player is 31 years old, 78% of which being age 18 or older (GameStop 10-K). In addition,
3
the continually growing digital content market was estimated to be between $8 and $10 billion in
2014, which is not included in the initial calculation for the video game product market. The
digital gaming market refers to games and game accessories downloaded on to consoles,
computers, smartphones, tablets, and other devices. This industry is key due to the fact that the
newest consoles and video game platforms offer full video games for download and other
associated downloadable content. In addition, the casual game market is defined as simply, easy
to use, low-price video games that are played on web browsers or downloaded onto gaming
platforms. Through its Kongegrate subsidiary, GameStop generates revenues from these casual
games through advertisement and paid premium downloadable content.
Competitive Conditions
The electronic gaming industry is very competitive and frequently changing. GameStop
competes with a variety of entities, such as regional retail chains, consumer electronic stores,
video game and PC software specialty stores, direct sales by software publishers, online retail
companies, and companies that rent video games for temporary use (GameStop 10-K). Some of
the specific and most direct competitors of GameStop are Wal-Mart, Target, Amazon, Best Buy,
K-Mart, and others, as many different retailers carry video games and associated products. Aside
from specific retail competitors, GameStop competes with other forms of entertainment activities
as wholes. Examples of other entertainment activities and industries that may affect GameStop’s
business are casual games, mobile games, movies, television, theatre, sporting events, family
entertainment centers, and more. Other competitors of interest are Microsoft, Sony, and other
console producers, as video games are now available for direct download onto these consoles
from the producers.
Developments related to GameStop, the Industry, and the Audit
A core business goal of GameStop is to successfully manage its amount of retail store locations
to maximize profitability, and has historically opened 300-400 new stores every year. GameStop
believes that by being a destination location, it can offer a variety of products and services that
will incentivize game enthusiasts to travel to GameStop store locations and spend time in them.
This strategy of continuing to grow its physical presence directly conflicts with the fact that
video games are increasingly being downloaded directly from the Internet, without the necessity
of traveling to a brick and mortar store to purchase video games. Another specific development,
perhaps related to increasing direct downloads, is that GameStop closed all of its 108 stores in
Spain in 2014 and completely exited the Spanish market due to lack of profitability in this area.
GameStop opened 49 stores and closed 300 stores in 2014 overall, which is a net closing of 251
stores. In addition, GameStop has stated that it plans to open 50 stores and close 200-300 stores
in 2015, which is another net closing of roughly 250 stores (GameStop 10-K). Given that
GameStop had 6,690 store locations total in 2014, closing 250 a year is relatively significant in
terms of reducing its physical store presence. However, GameStop does plan to increase its
digital presence. According to its 2014 10-K, GameStop recognizes the fact that the future of
growth in the video game industry is going to revolve around video games delivered in digital
form and other new variations of gaming. GameStop says that its response to this increasing
4
digital demand is the fact that it currently sells various types of subscription time cards and
downloadable content within its stores, but both of these products can be downloaded at home
already anyway. A more optimistic strategy GameStop mentions in its 10-K is its continued
development and investment in Kongregate, which is its subsidiary that offers free-to-play games
where users have the option to purchase in game content and other downloads with virtual
currency. With games available in both the Apple and Google application stores, Kongregate has
amassed 36 million mobile installs of games and continues to release new titles (GameStop 10K).
Corporate Governance
GameStop’s Board of Directors include 11 members from a variety of corporate, financial, and
other backgrounds. The board is led by Executive Chairman Daniel A. DeMatteo, who has been
an executive officer in the video gaming industry since 1988 and served as GameStop’s Chief
Operating Officer from 1996 to August 2008. The current Chief Executive Officer of GameStop
is J. Paul Raines, who was named GameStop’s Chief Operating Officer in September 2008 prior
to becoming Chief Executive Officer in June 2010. Mr. Raines has past experience in
management and board positions for Home Depot, L.L. Bean, and Advance Auto Parts
(GameStop Board of Directors). GameStop has developed a Code of Ethics, Standards, and
Conduct that is applicable to all of its management-level employees, and pledges to properly
disclose any amendment’s to this Code to its website at www.gamestop.com (GameStop 10-K).
Regulations
An applicable and relevant regulation that GameStop and the video game retail industry must
pay close attention to is the Entertainment Software Rating Board’s (ESRB) age and content
ratings of video games. Many of the newest and most popular video games are rated M for
Mature, and can only legally be sold to a person over the age of 18, and if a minor is purchasing,
an adult must be present to authorize the legality of the purchase. GameStop employees must be
thorough in verifying customers’ age before selling them mature games, and be aware of in-store
advertisements and demos that could potentially be psychologically damaging to underage
customers. GameStop must follow ESRB retail requirements to avoid any potential harm,
damages, or lawsuits that might arise from selling Mature video games to underage children
(esrb.org).
5
Analytics
GameStop Corp.
Comparitive Consolidated Income Statement ($ in Millions)
% Change in Account Balances from YE 2014 to YE 2015
Period Ending Period Ending
Materiality Footnote
01/31/2015
02/01/2014
Variance % Change (1-Yes, 0-No) Reference
Net sales
$9,296.00
$9,039.50
$256.50
2.84%
1
A
Cost of sales
$6,520.10
$6,378.40
$141.70
2.22%
1
B
Gross profit
$2,775.90
$2,661.10
$114.80
4.31%
Selling, general and administrative expenses
$2,001.00
$1,892.40
$108.60
5.74%
1
C
Depreciation and amortization
$154.40
$166.50
($12.10)
-7.27%
0
D
Goodwill impairments
$10.20
($10.20) -100.00%
Asset impairments
$2.20
$18.50
($16.30)
-88.11%
0
E
Operating earnings (loss)
$618.30
$573.50
$44.80
7.81%
Interest expense, net
$10.00
$4.70
$5.30
112.77%
0
Earnings (loss) before income tax expense
$608.30
$568.80
$39.50
6.94%
Income tax expense
$215.20
$214.60
$0.60
0.28%
0
Net income (loss)
$393.10
$354.20
$38.90
10.98%
Materiality: Variances greater than or equal to 5% of Net Income ($19,655,000) and Items Deemed Unusual
A. Sales increase in 2014 relate primarily to the increase in new video game hardware sales
associated with the release of the PlayStation 4 and the Microsoft Xbox One in November 2013,
and an increase in sales of Mobile and Consumer Electronics due to acquisition of stores in the
technology brands segment. Both revenue increases were partially offset by a decrease in new
video game software sales due to a decrease in previous generation console software sales, and a
weak lineup of titles released in 2014; see Exhibit A-1 for an Analysis of Revenues. (GameStop
Corp 10K, Notes to Consolidated Financial Statements)
B. Increase in COS is due to the increase in Sales discussed in Footnote A. Additionally, sales of
new generation consoles and associated accessories carry lower margins than their older
generation counter-parts. These increases were partially offset by decreases in COS for preowned games, as well as an increase in the growth for the web and mobile gaming platform,
Kongregate; see Exhibit A-2 for an analysis of changes in Gross Profit %. (GameStop Corp 10K,
Notes to Consolidated Financial Statements)
C. Increase in selling and administrative expenses are due primarily to growth in the Technology
Brands segment, which require more selling and administrative expenses as compared to other
segments. (GameStop Corp 10K, Notes to Consolidated Financial Statements)
D. The decrease in depreciation and amortization is due primarily to a decrease in the capital
expenditures related to the video game brands segment. (GameStop Corp 10K, Notes to
Consolidated Financial Statements)
E. The higher Impairment expense in 2013 was due primarily to impairments of 9.5 million for
technology assets and intangible assets related to the abandonment of Spawn Labs, as well as 9
million in property impairment. (GameStop Corp 10K, Notes to Consolidated Financial
Statements)
6
Exhibit A-1
Revenue – Detail ($ in Millions)
Net Sales:
New video game hardware
New video game software
Pre-owned and value video game products
Video game accessories
Digital
Mobile and consumer electronics
Other
Total
Period Ending
01/31/2015
Period Ending
02/01/2014
Variance
% Change
$2,028.7
$3,089.0
$2,389.3
$653.6
$216.3
$518.8
$400.3
$9,296.0
$1,730.0
$3,480.9
$2,329.8
$560.6
$217.7
$303.7
$416.8
$9,039.5
$298.7
($391.9)
$59.5
$93.0
($1.4)
$215.1
($16.5)
$256.5
17.3%
-11.3%
2.6%
16.6%
-0.6%
70.8%
-4.0%
2.8%
Exhibit A-2
Gross Profit Detail ($ in Millions)
Period Ending
01/31/2015
Gross Profit:
New video game hardware
New video game software
Pre-owned and value video game products
Video game accessories
Digital
Mobile and consumer electronics
Other
Total
Period Ending
Gross Profit %
02/01/2014 Gross Profit %
$196.6
$716.9
$1,146.3
$246.1
$152.0
$186.7
$131.3
$2,775.9
9.7%
23.2%
48.0%
37.7%
70.3%
36.0%
32.8%
29.9%
7
$176.5
$805.3
$1,093.9
$220.5
$149.2
$65.1
$150.6
$2,661.1
10.2%
23.1%
47.0%
39.3%
68.5%
21.4%
36.1%
29.4%
% Change
-0.5%
0.1%
1.0%
-1.7%
1.7%
14.6%
-3.3%
0.4%
GameStop Corp. Comparitive Balance Sheet ($ in Millions)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Merchandise inventories, net
Deferred income taxes current
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
Property and equipment:
Land
Buildings and leasehold improvements
Fixtures and equipment
TOTAL PROPERTY AND EQUIPMENT
Less accumulated depreciation
Net property and equipment
Goodwill
Other intangible assets, net
Other noncurrent assets
TOTAL NONCURRENT ASSETS
TOTAL ASSETS
Variance
Materiality
%Change (1 – Yes, 0 – No)
Footnote
Reference
31-Jan-15
1-Feb-14
$610.1
$113.5
$1,144.8
$65.6
$128.5
$2,062.5
$536.2
$84.4
$1,198.9
$51.7
$78.4
$1,949.6
$73.9
$29.1
($54.1)
$13.9
$50.1
$112.9
13.8%
34.5%
-4.5%
26.9%
63.9%
5.8%
0
0A
0
0
0
0
$18.3
$609.2
$888.2
$1,515.7
$1,061.5
$454.2
$1,390.4
$237.8
$101.4
$2,183.8
$4,246.3
$20.4
$609.6
$841.8
$1,471.8
$995.6
$476.2
$1,414.7
$194.3
$56.6
$2,141.8
$4,091.4
($2.1)
($0.4)
$46.4
$43.9
$65.9
($22.0)
($24.3)
$43.5
$44.8
$42.0
$154.9
-10.3%
-0.1%
5.5%
3.0%
6.6%
-4.6%
-1.7%
22.4%
79.2%
2.0%
3.8%
0
0
0
0
0
0
0B
0
0
0
0
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable
$815.6
$783.9
$31.7
4.0%
Accrued liabilities
$803.6
$861.7
($58.1)
-6.7%
Income taxes payable
$15.4
$78.0
($62.6)
-80.3%
Notes payable
$5.1
$2.4
$2.7
112.5%
TOTAL CURRENT LIABILITIES
$1,639.7
$1,726.0
($86.3)
-5.0%
Deferred income taxes
$95.9
$37.4
$58.5
156.4%
Long-term debt
$350.6
$1.6
$349.0
21812.5%
Other long-term liabilities
$92.4
$75.0
$17.4
23.2%
TOTAL LONG TERM LIABILITIES
$538.9
$114.0
$424.9
372.7%
TOTAL LIABILITIES
$2,178.6
$1,840.0
$338.6
18.4%
STOCKHOLDERS’ EQUITY:
Preferred stock
$0.0
$0.0
Class A common stock $.001 par value
$0.1
$0.1
$0.0
0.0%
Additional paid-in-capital
$0.0
$172.9
($172.9)
-100.0%
Accumulated other comprehensive income (loss)
($25.4)
$82.5
($107.9)
-130.8%
Retained earnings
$2,093.0
$1,995.9
$97.1
4.9%
TOTAL STOCKHOLDERS’ EQUITY
$2,067.7
$2,251.4
($183.7)
-8.2%
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$4,246.3
$4,091.4
$154.9
3.8%
Materiality: Variances > 5% of Total Assets ($212,315,000) and/or items deemed unusual
0
0
0
0
0
0
1C
0
0
0D
0E
0
A. The Receivables balance increase is due primarily to an increase in activity in the Technology
Brands Segment. This amount is partially offset by the balance in Allowance for Doubtful
Accounts. The estimate for doubtful accounts does not show any related increase from the
previous year (see Exhibit A-3 for a calculation of net receivables). This estimate should be
evaluated. (GameStop Corp 10K, Notes to Consolidated Financial Statements)
B. GameStop Corp reports a net decrease of 24.3 M that does not result from impairments. All of
the goodwill reductions result from foreign currency translation adjustments for reporting units
in Canada, Australia, and Europe. These reductions are partially offset by a small goodwill
increase reported through the Technology Brands segment specifically due to the acquisition of
8
AT&T resellers and authorized Apple resellers. (GameStop Corp 10K, Notes to Consolidated
Financial Statements)
C. The increase in long-term debt is due to the issuance of $350 million unsecured 5.5% 5-year
notes due on October 1, 2019. (GameStop Corp 10K, Notes to Consolidated Financial
Statements)
D. The Additional Paid-in-Capital balance was reduced by a common stock repurchase, which
was partially offset by a modest payout in stock-based compensation. (GameStop Corp 10K,
Notes to Consolidated Financial Statements)
E. The decrease in this account is related in its entirety to a foreign currency translation
adjustment decrease of $107.9M (GameStop Corp 10K, Notes to Consolidated Financial
Statements)
Exhibit A-3
Gamestop Corp – Calculation of Receivables, Net
31-Jan-15 1-Feb-14
Bankcard receivables
$52.9
$42.6
Other Receivables
$64.3
$45.5
Allowance for doubtful accounts
($3.7)
($3.7)
Total receivables, net
$113.5
$84.4
9
Risk Assessment
GameStop has a high inherent risk because many incidences of fraud involve overstatement of
revenue, inventory, and account receivable. Decline in sales due to economic declines, product
obsolescence, increased competition, and technology improvements can result in fraud or
overstatement of revenues. Furthermore, GameStop Corp. operates as a multichannel video game
retailer. It sells new and pre-owned video game hardware; physical and digital video game
software; pre-owned and value video game products; video game accessories, such as controllers
and gaming headsets. Thus, technology has a significant impact on the company. For example,
PlayStation 2 games will be obsolete once the new PlayStation 3 comes out resulting in loss of
profit and obsolete inventory. Competition of different gaming companies and gaming consoles
create high risk and uncertainty of how much inventory to carry and when they will become
obsolete. In addition, the company sells used games, which creates the need for estimates when
valuing those games. At what price should we carry that inventory? How much are they worth?
Not knowing the exact answers to these questions can create improper inventory valuations.
Another issue that may raise questions would be pre-ordered games. New and upcoming games
are pre-ordered by customers. The company may tempt to recognize the revenue at the day of the
order. Revenue recognition policies need to be reviewed and followed. The tone at the top need
to be explicit regarding that matter. In 2013, GameStop’s financial statement looked horrible
because of goodwill loss contingency. Trying to compete and dominate the market, there is a
possibility for overstatements for the year of 2014 in order to give a better picture of the financial
statement.
We design and perform our risk assessment procedures to obtain an understanding of GameStop
and its environment, including its internal controls, and to evaluate the risk of material
misstatement in the financial statements. Utilizing analytical procedures, observation, and
inspection of GameStop’s financ …
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