Final project for graduate-level auditing course

1. Hayden Fein
Auditing
Fall 2015
Rowe
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2. BACKGROUND
• Industry: Non-Alcoholic Beverages
• HQ:Atlanta, GA
• Founded:1886
• Listed on NYSE (KO)
• Market Cap: $179.9B(Forbes)
• World’s Largest Beverage Company
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3. HOWTHEY MAKE MONEY
• Owns, licenses and markets more than
500 brands, including sparkling beverages,
diet beverages, waters, juices, teas, coffees,
and energy and sports drinks
• Beverage concentrates:
• Produce concentrate which is then
sold to various bottlers throughout the
world who hold exclusive territory,
distributors and retailers
• Finished sparkling and still beverages:
• Sell unit cases of finished beverages to
distributers and retailers who then sell
the products to consumers
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Coca-Cola is a manufacturer, distributer and marketer of non-alcoholic beverages

4. CLIENT BUSINESS RISK
• Evolving consumer preferences
• Increased competition in the marketplace
• Health concerns: obesity, poor diets & inactive
lifestyles
• Water quality & quantity
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5. AUDITOR BUSINESS RISK
• Risk of litigation if Coca-Cola is
sued for various reasons
product related or otherwise
• Risk of damage to reputation if
bad press is released related to
Coca-Cola’s business practices
• Risk of losing existing and future
clients who have a conflict of
interests with Coca-Cola
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6. ACCEPTABLE AUDIT RISK
• Acceptable audit risk is low for this engagement
• Low likelihood of financial difficulty
• High probability that the company will successfully continue in business
for at least two years and be able to pay its debts as they become due
• Client is a widely-held public company, wide-spread external use is highly
probable
• Management has high integrity
• Independently audited for many years
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7. STRATEGIC ANALYSIS
• Commit to expanding its variety of choices they
provide to meet ever-changing consumer
preferences
• To address growing concern about nutritional
impact from product offerings
• Continue to strengthen marketing and innovation
to maintain brand loyalty and market share
• Offer low or no calorie beverages and provide
transparent nutrition information
• Improve water use efficiency by treating
wastewater prior to discharge
• Achieve goal of replenishing the water that
Coca-Cola and its bottling partners source
and use in their finished products.
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8. PROCESS ANALYSIS
• Acquire ingredients from farmers and suppliers
• Manufacture concentrate and finished products and recognize inventory
• Ship concentrate and unit cases of finished products to bottling partners and distributors and recognize
revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales
price is fixed or determinable, and collectibility is reasonably assured.
• Retailers purchase products from bottling partners and distributors and sell products to consumers
Source: Coca-ColaValue Chain 2015
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9. PLANNING ANALYTICAL
PROCEDURES
• Calculate price to earnings ratio
• Compare with industry to find out how much an investor of Coca-Cola
common stock pays per dollar of current earnings compared to industry average
• Calculate equity to total assets ratio
• Compare with prior year to check if total assets are increasing more than
owners’ equity
• Calculate number of days sales in accounts receivables ratio
• Compare with industry average to gauge how Coca-Cola’s turnover ratio is
performing
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10. ACCEPTTHE AUDIT
ENGAGEMENT
• No past material
misstatements
• No significant risks
• Company’s financial
performance is superior to
to industry
• Control risk Is low
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11. CYCLES
• Inventory has high inherent risk with regards to valuing its account balance
• Coca-Cola’s inventory account balance depends on what value is considered
for a product work-in-process stage to move into the finished good stage
• Revenue recognition has high inherent risk with regards to its completeness and
cutoff
• Coca-Cola’s earnings process is dependent on how and when it recognizes
revenue
• Goodwill has high inherent risk with regards to valuing its account balance
• The majority of Coca-Cola’s share value is its brand name and “secret
formula”
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12. FRAUD RISKS
• Inventory
• By overstating inventory, Coca-Cola will also be overstating gross profits, net
income, current assets, retained earnings and other related financial ratios
• Revenue Recognition:
• Illegal to recognize revenue early by holding books open to the end of the
amount period to accumulate more sales
• Goodwill
• Since goodwill makes up a decent amount of Coca-Cola’s assets, misstating this
intangible asset value would affect stock value
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13. MATERIALITY FOR
PLANNING PURPOSES &
TOLERABLE ERROR RATES
• Materiality for planning purposes:
• Pre-Tax Income: 9,708,000,000 (Base)
• Acceptable audit risk: Low 6%
• Preliminary judgement about materiality: 582,480,000
• Performance materiality: 436,860,000
• Tolerable error rates
• Inventory, goodwill and revenue recognition accounts should all have low
tolerable error rates (1% - 4%)
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14. BIBLIOGRAPHY
• "Coca-Cola Co. (KO) | Goodwill and Intangible Assets." <i>Stock Analysis on
Net Web. 19 Nov. 2015.
• The Coca-Cola Company, Inc. (2014). Form 10K 2014. Retrieved fromThe
Coca-Cola Company, Inc. Online Database
• The Coca-Cola Company, Inc. "Coca-Cola System andValue Chain."The Coca-
Cola Company Web. 19 Nov. 2015.
• Forbes. "Coca-Cola." <i>Forbes</i>. Forbes Magazine, May 2015.Web. 19 Nov.
2015.
• Yahoo! Finance. "The Coca-Cola Company."Yahoo! Finance.Web. 19 Nov. 2015.