This document discusses the case of Just for Feet, Inc., a retail shoe company that went bankrupt in the late 1990s. It provides background facts on the company's founding, growth, and bankruptcy. It then analyzes various financial metrics and ratios for Just for Feet from 1996-1998 that indicate high risks, such as increasing inventory and debt levels. The document also identifies internal control and competitive risks for such a large retail operation and how these should affect audit planning. Finally, it lists audit risk factors for Just for Feet's 1998 audit and asks to identify the top five risks and whether the auditors appropriately addressed them.
General Principles of Intellectual Property: Concepts of Intellectual Proper...
16Case 1.3 Just for Feet, Inc.Prepared byIvette Must.docx
1. 1
6
Case 1.3 Just for Feet, Inc.
Prepared by
Ivette Mustelier
for
Professor C.E. Reese
in partial fulfillment of the requirements for
ACC-502-11 – Advance Auditing
School of Business / Graduate Studies
St. Thomas University
Miami Gardens, Fla.
Term Spring 2, 2019
March 26, 2019
TABLE OF CONTENTS
Issues 1
Facts 1
Analysis 1
Conclusions 6
Bibliography 8
2. 2
Issues
1. Prepare common-sized balance sheet and income statements
for Just for Feet for the period 1996-1998. Also compute key
liquid, solvency, activity, and profitability ratios for 1997 and
1998. Given these data, comment on what you believe were the
high-risk financial statements items for the 1998 Just for Feet
audit.
2. Just for Feet operated large, high-volume retail stores.
Identify internal control risks common to such businesses. How
should these risks affect the audit planning decisions for such a
client?
3. Just for Feet operated in an extremely competitive industry,
or subindustry. Identify inherent risk factors common to
business facing such competitive conditions. How should these
risks affect the audit planning decisions for such a client?
4. Prepare a comprehensive list, in a bullet format, of the risk
factors present for the 1998 Just for Feet audit. Identify the five
audit risk factors that you believe were most critical to the
successful completion of that audit. Rank these risk factors
from least to most important and be prepared to defend your
rankings. Briefly explain whether or not you believe that the
Deloitte auditors responded appropriately to the five critical
audit risks factors that you identified.
5. Put yourself in the position of Thomas Shine in this case.
How would you have responded when Don-Allen Ruttenberg
asked you to send a false confirmation to Deloitte & Touche?
Before responding, identify the parties who will be affected by
your decision.Facts
Just for FEET, INC was started in Birmingham, Alabama in
1988. South African entrepreneur Harold Ruttenberg believed
the market for athletic shoes was vulnerable to a new business
3. model. He was right, and ten years later his “store-within-a-
store” model had 300 locations and sales just shy of $775
million (Knapp, 2015). Impressively, Just for FEET continued
to increase profits and sales in the late 1990s in spite of similar
companies struggling in the increasingly competitive athletic
shoe retail market. While continuing to promote the prospects
of the company, Harold, his wife, and his son all sold much of
their stock in the company in 1996. Three years later, Harold
resigned as CEO and was replaced by a recovery expert after
Just for FEET defaulted on a large interest payment (Knapp,
2015). Shortly after, the company filed for bankruptcy, which
lead to investigations of both Just for FEET and their
independent auditors, Deloitte & Touche. Many of the senior
executives at Just for FEET were found guilty of intentionally
misstating inventory values as well as improperly inflating
revenue in a variety of ways. The top two auditors on the
engagement were suspended and Deloitte & Touche was fined
$375,000 by the SEC for ignoring obvious red flags over the
course of the engagement (Knapp, 2015). Perhaps the biggest
red flag was the “huge increase in vendor allowance receivables
between the end of fiscal 1997 and fiscal 1998” (Knapp, 2015,
p. 48). Deloitte sent receivables confirmations to Just for
FEET’s suppliers to confirm the amounts, but the executive vice
president at Just for FEET convinced many of the suppliers to
sign the confirmations even though the amounts had been
artificially inflated. Eight of the 13 confirmations that were sent
back to Deloitte in non-standard letters with ambiguous
statements and information, but Deloitte accepted the
confirmations as valid anyways.Analysis
1. Prepare common-sized balance sheet and income statements
for Just for Feet for the period 1996-1998. Also compute key
liquid, solvency, activity, and profitability ratios for 1997 and
1998. Given these data, comment on what you believe were the
high-risk financial statements items for the 1998 Just for Feet
audit.
Common-size balance sheet
4. Common size balance sheet shows both the numerical values
and the percentage of each account in relation to the total assets
and total liabilities. It makes easier to analyze the chance of a
company’s balance sheet over multiple time periods. A
common-size balance sheet provides the financial position of a
company.
To prepare a common size balance sheet for Just for Feet Inc for
1997-1999, each of the asset were converted to the equivalent
common-size amount by dividing the value of the asset by the
value of the total assets and multiplied with 100, then a
percentage of asset value is determined. Same way was used for
Liabilities, each individual liability was divided by the total
liabilities and shareholder’s equity value and multiplied by 100.
The Just for Feet balance sheet shown in Exhibit 1 summarizes
the common-size equivalents calculations for cash and cash
equivalents and repeat the calculation for each of the assets and
liabilities amounts from 1997 to 1999. The items that stand out
in 1999 balance sheet as being potentially problematic are: Drop
in cash equivalents from 36.9% of assets in 1997 to 1.8% in
1999; Increase in inventory from 35.5% of assets in 1997 to
58% in 1999; Increase in Accounts Payables from 10.3% of
liabilities in 1997 to 14.46% of liabilities in 1999; Increase in
Long Term debt from 2.8% in 1997 to 33.5% in 1999.
Common-size income statement
The common-size income statement for Just for Feet Inc was
prepared by converting each of expenses listed to the equivalent
common-size amount by dividing the value of expenses by the
value of the total revenues. The calculation of the cos of sale
was performed using cost of sale value and total sale value
multiplied by 100. Each expense was divided by the net sales as
denominator to get the percentage on sales.
The exhibit 2 shows a summarization of the common size
equivalent calculation in the income statement. The item that
stand out in the income statement as being potentially
problematic are subtle, but they are meaningful when one
considers that the company has very low net profit margins
5. (ranging from 5% in 1997 to 3% in 1999). Increase in store
operating cost from 27% of sale in 1997 to 30% in 1999.
Key Ratios for liquidity, solvency, activity and profitability
ratios for 1998 and 1999
a. Key liquidity ratios include the current ratio and the quick
ratio:
· Current Ratio was calculated by dividing the current asset by
current liabilities
Current ratio 1997
=
Current Asset 1997
Current Liabilities 1997
=
314,743
146,914
=
2.14
Current ratio 1998
6. =
Current Asset 1998
Current Liabilities 1998
=
311,167
155,706
=
2.00
· Quick ratios were calculated by dividing the sum of cash and
equivalents, marketable securities and account receivable and
other current assets (if they are liquid) by current liabilities.
Quick ratio 1997
=
Cash and Eq. + Marketable sec. + Accts. Rec. + Other Current
Assets
Current Liabilities
=
8. 155,706
=
105,039
155,706
0.67
b. Key solvency ratios include debt-to-assets, time interest
earned:
· Debt to Equity ratio was calculated by dividing the total debt
by total assets. It is a ratio of debt over the equity.
Debt-to-Assets 1997
=
Long term Debt + Current Liabilities
Total Assets
=
10,364 + 146,914
375,834
10. 180,268
448,352
=
0.40
· Times-interest-earned was calculated by dividing earnings
before interest and taxes by interest charges.
Time-Interest-Earned 1997
=
Earnings before Taxes + Interest Expenses
Interest Expenses
=
24,743 + 832
832
=
25,575
832
=
11. 30.7
Time-Interest-Earned 1998
=
Long term Debt + Current Liabilities
Total Assets
=
34,220 + 1,446
1,446
=
35,666
1,446
=
24.7
c. Activity ratios include inventory turnover, age of inventory,
12. accounts receivable turnover, and total assets turnover:
· Inventory turnover ratio was calculated by dividing the cost of
goods sold by the average inventory for the period.
Inventory Turnover 1998
=
COGS 1998
(Inventory 1998 + Inventory 1997)/2
=
279,816
(206,128 + 133,323)/2
=
279,816
169,726
=
1.65
Inventory Turnover 1997
=
13. COGS 1997
Inventory 1997
=
147,526
133,323
=
1.11
· Accounts receivable turnover was calculated by dividing sales
by average account receivable.
Account Receivable Turnover 1998
=
Sales 1998
(Acc. receivable for 1997 + Acc. Receivable for 1998)/2
=
478,368
(6,553 + 15,840)/2
14. =
478,368
11,197
=
42.72
Account Receivable Turnover 1997
=
Sales 1997
Account receivable for 1997
=
256,397
6,553
=
39.13
· Total Asset turnover was calculated by dividing net sales by
average total assets
Total asset Turnover 1998
=
15. Net Sales 1998
(Total Assets 1997 + Total Assets 1998)/2
=
478,368
(375,834 + 448,352)/2
=
478,368
412,093
=
1.16
Total asset Turnover 1997
=
Net Sales 1997
Total Assets 1997
16. =
256,397
375,834
=
0.68
d. Profitability Ratios include profit margin on sales and return
on total assets:
· Profit margin on sales is calculated by dividing net income by
net sales.
Net Profit Margin 1997
=
Net Income
*100
Sales
=
13,919
*100
256,397
17. =
5.43%
Net Profit Margin 1998
=
Net Income
*100
Sales
=
21,403
*100
478,638
=
4.47%
· Return on total assets was calculated by dividing net income
plus interest expenses by average total assets.
Return on Total Assets 1998
=
18. Net Income 2018 + Interest Expense 2018
(Total Assets 1998 + Total Assets 1997)/2
=
21,403 + 1,446
(448,352 + 375,834)/2
=
22,849
412,093
=
0.055
Return on Total Assets 1997
=
Net Income 2017 + Interest Expense 2017
Total Assets 1997
19. =
13,919 + 832
375,834
=
14,751
375,834
=
0.039
Based on the above calculations I can state that several red flags
appear for different items in Just for Feet Inc:
Inventory Item:
· Inventory increased from 35.5% of asset in 1997 to 58% of
asset by 1999.
· Inventory was growing much more rapidly than other financial
statement items.
· The age of the inventory went from 218 days to 241 days from
1998 to 1999, raising concern about obsolescence issues.
Cash:
· Client’s cash resources dwindled considerably from 37% of
assets in 1997 to less than 2% by 1999. In absolute amounts,
cash dropped from $138.7 M to $12.4 M the same timeframe.
· According to the cash flow statement, FEET had negative
operating cash flow each year from 1997 to 1999.
· The company’s quick ratio was 0.37 in 1999, down from 0.67
20. at 1997
Debt:
· Just for Feet Inc’s long-term debt increased sharply in FY
1999, the long-term debt ratio rose from 0.09 at the end on 1998
to 0.71 at the end of 1999.
Relative Growth Rates for Ratios:
· Inventory and accounts payables growth should track each
other. In this case inventory grew more than 200% from 1997 to
1999, while accounts payable increased a more modest 157%.
· While Just for Feet Inc’s gross margin remained relatively
stable from 1997 to 1999, this seems suspicious as many of the
Company’s financial ratios deteriorated during the same
timeframe.
2. Just for Feet operated large, high-volume retail stores.
Identify internal control risks common to such businesses. How
should these risks affect the audit planning decisions for such a
client?
Large, high-volume store create unique auditing challenges one
of them is revenue recognition where a large number of
transactions (particularly in a business where training tends to
be minimal and employee turnover is usually high), increases
the likelihood that a number of transactions are incorrectly
processed. This would increase further if the store used any
number of promotional deals such as buy one get one free
transaction. On the other hand, cash may be used for a
disproportionate amount of transactions, creating additional
opportunities for skimming at the register.
In the case of Expense/Inventory Recognition a large portion of
inventory in the store was easily accessible to both customers,
and employees increase the risk of theft or shrinkage.
Also, the multiple display approach for shoes – by brand, by
function etc., complicated the any physical inventory process
and the associated controls.
Organization was very decentralized in terms of store
operations; further complicates the process of ensuring that
21. financial controls are adequate and consistent across the
organization and organizations also creates opportunities for
less senior management to potentially take advantage of the lack
of central oversight.
As control issues become more complex, so does the difficulty
of conducting an effective audit. In a decentralized, high-
volume, retail organization, a prudent auditor would increase
their sampling methods for audit tests as a way of reducing the
risk of overlooking a problem.
3. Just for Feet operated in an extremely competitive industry,
or subindustry. Identify inherent risk factors common to
business facing such competitive conditions. How should these
risks affect the audit planning decisions for such a client?
Retail business present a number of unique challenges in terms
of establishing internal controls, large number of transactions,
cash transactions, employee turnover etc. These challenges are
made more complex when a retailer operates in a highly
competitive sector or retailing such as trendy clothing or
athletic shoes.
Inventory can quickly become obsolete, and it would impact
negatively on the difficulty to predict the correct amount of
inventory to maintain and also contribute that forecasting the
margin at which that inventory will sell become more difficult.
Obsolete inventory and reduce margin sales may have a
negative impact on cash flow and increase the need for
additional financing beyond plan. In a decentralized
organization, store and district level management may seek to
dress up their financial reports in order to maintain their
chances of receiving the best inventory.
In the case of any additional financing were needed above plan
run the risk of violating debt covenants or sources of vendor
financing particularly if sale of a certain trend do not go as
planned.
Other aspect is that turnover in management (particularly at the
store level) both within the company and between companies,
may further complicate ability of an auditor to correctly assess
22. a firm’s financial status.
4. Prepare a comprehensive list, in a bullet format, of the risk
factors present for the 1998 Just for Feet audit. Identify the five
audit risk factors that you believe were most critical to the
successful completion of that audit. Rank these risk factors
from least to most important and be prepared to defend your
rankings. Briefly explain whether or not you believe that the
Deloitte auditors responded appropriately to the five critical
audit risks factors that you identified.
The text cites a number of issues that may have been audit risk
factors for Just for feet Inc in its 1998 audit:
· Management style and approach to managing Investor
Expectations. Management was particularly interested in its
short-term share price as a measure of its success or failure,
management placed significant emphasis on meeting short-term
earning goals, go big or go home approach towards expansion
even if changes in the business environment warranted a more
moderate approach and dominant personality of CEO.
· General retail sector risk. Decentralized management approach
in industry known to have factors, high-volume of transactions,
large amount of transactions conducted in cash, significant
employee turnover, and ease of customer and employee access
to inventory (shrinkage and theft).
· Highly-competitive subsector of retailing. Trend-driven
merchandise increases likelihood of incorrect ordering,
incorrect pricing and/or a significant chance of obsolescence,
rapid change in trends make it more difficult to recognize and
respond to problems, and long lead times for inventory orders
reduce operating flexibility.
· Financial Condition Flags/Concerns. Large increase in
inventory in proportion to historic norms, consistently negative
operating cash flow (indicating a continued need to raise capital
and to keep reporting results that will attract investors),
increase in vendor allowance receivable, slow growth of
accounts payable relative to inventory gains, increase in
financial leverage, declining cash on balance sheet and
23. consistently steady gross and operating margins in a business
that has a meaningful level os fixed costs and that is highly
seasonal in terms of sales.
Of the factors listed above, the five factors that would likely
increase the likelihood of potential problems at Just for Feet Inc
in 1998 are:
· Consistently negative operating cash-flow indicate that
reported results are not self-sustaining and that the company
may well need new financing.
· Large increase in inventory could suggest that company failed
to correctly identify a number of trend and that it has a
significant amount of inventory that would require a write-
down.
· Declining cash on the balance sheet in a business where high
inventory turnover and favorable supplier credit terms could
potentially result in a negative working investment requirement.
· Management’s dogged focus on meetings short-term investor
expectations and maintaining a high share price regardless of
market conditions.
· Consistenly steady quartely gross and operating margins in a
business that would be expected to be highly seasonal in sales
and with a meaninful level of costs that do no fluctuate
seasonally.
· Increase in vendor allowance receivable, without standard
supporting documentation.
Deloitte appears to have been cognizant of the potetial audit
risk at Just for feet Inc; The auditor took steps to increase
senior management oversight on its high risk accounts and
identified vendor alowances as a potential issue for all audit
clients.
Where Deloitte fell short was being persuaded by Just for Feet
Inc management to accept the non standars vendor allowance
letters and other explanations, for plrblems in the business.
Deloitte should have followed through with its concern to the
Board of Directors and the Audit Committee and perhaps
included some commentary in its audit report.
24. 5. Put yourself in the position of Thomas Shine in this case.
How would you have responded when Don-Allen Ruttenberg
asked you to send a false confirmation to Deloitte & Touche?
Before responding, identify the parties who will be affected by
your decision.
· Shine should have rejected Ruttenberg’s request. Shine need
to explain the situation to Ruttenberg regarding ethical issues,
and impact of this false confirmation.
· Although Just for Feet Inc was likely a large customer, Shine
had a responsibility to his Board and shareholders.
· Shine is clearly liable for abetting the fraud. Shine should
have reported the request to Just for Feet Inc’s audit committee
as well as its auditors.
· Shine should also have made the information available to his
Board and auditors as Ruttenberg’s request would likely have an
impact on Shine’s firm audit as well.
Conclusions
While earnings increased and the company's current ratio
increased from 1997 to 1998, the company's operations
generated an increasing deficit cash flow level; and the
company's current liquidity index shows a lack of any liquid
resources relative to the current level of debt due. The
company is in a significant liquidity crisis.
Bibliography
Gartland, D. J., C.P.A. (2017). The importance of audit
planning. Journal of Accountancy, 224(3), 14-15. Retrieved
from http://ezproxy.liberty.edu/login?url=https://search-
proquestcom.ezproxy.liberty.edu/docview/1933270057?accounti
d=12085
Jensen, M. C. (1993). The modern industrial revolution, exit,
and the failure of internal control systems. the Journal of
Finance, 48(3), 831-880.
Knapp, M. (2015). Contemporary Auditing: Real Issues and
Cases. Boston: Cengage Learning.
25. Laksmana, I., & Yang, Y. (2015). Product market competition
and corporate investment decisions. Review of Accounting &
Finance, 14(2), 128-148. Retrieved from
http://ezproxy.liberty.edu/login?url=https://search-
proquestcom.ezproxy.liberty.edu/docview/1675841097?accounti
d=12085
Yücel, E. (2013). Effectiveness of red flags in detecting
fraudulent financial reporting: An application in turkey.
Muhasebe Ve Finansman Dergisi, (60) Retrieved from
http://ezproxy.liberty.edu/login?url=https://search-
proquestcom.ezproxy.liberty.edu/docview/1808803726?accounti
d=12085
JUST FOR FEET, INC.
BALANCE SHEETS (000s omitted)
January 31,
1999
1998
34. 58.2%
Total liabilities and
shareholders’ equity
689,396
100%
448,352
100%
375,834
100%
Exhibit 1
JUST FOR FEET, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (000S
omitted)
35. year Ended January 31,
1999
1998
1997
Net sales
774,863
99.8%
478,638
99.8%
256,397
99.8%
Cost of sales
452,330
42. Cumulative effect on prior years
of change in accounting principle
-
0.0%
-
0.0%
(2,041)
0.8%
Net earnings
26,648
43. 3.3%
21,403
4.8%
13,919
5.9%
Exhibit 2
Jessica Dunne
RE: Discussion - Week 5
COLLAPSE
Top of Form
NURS 6052: Essentials of Evidence-Based Practice
INITIAL POST
Because evidence-based practice (EBP) stems from
scientific research, it is imperative that nurses not only be able
to read and interpret the results of research studies; they must
also have a sound understanding of the various methodologies
utilized to gather, analyze, and interpret the data used within
those studies. The design of the study, the number of
participants, the data collection methods, all help to determine
the relevancy of the research for nursing practice. For example,
a large-scale, randomized control trial would more accurately
measure the impact of hand-washing on infection control. But, a
descriptive qualitative analysis would likely be a more effective
research design to determine motivators or deterrents of hand-
washing behavior. Polit and Beck (2017) maintain that
quantitative nursing research studies primarily aim to establish
causality. Philosophically speaking, causality is highly complex
because most phenomena cannot be contributed to a single
causative factor; rather, they are attributable to multiple,
sometimes convoluting variables. Correlation while often
compelling, does not equal causation, and a sound research
design will be able to distinguish the difference (Polit & Beck,
2017).
44. Post-Traumatic Stress Disorder
Rowe, Sperlich, Cameron, and Seng (2014) maintain
that post-traumatic stress disorder (PTSD) is an anxiety disorder
which develops after experiencing a psychologically traumatic
event.
It is characterized by intrusive reminders of the event such as
nightmares and flashbacks, avoidance of stimuli associated with
the event, persistent negative cognitions and numbing of
responses, and symptoms of anxiety, including hyper-vigilance,
difficulty concentrating, irritability, and sleep disturbances.
PTSD is associated with substantial distress and impairment in
functioning. (Rowe, Sperlich, Cameron, and Seng para. 8, 2014)
Epidemiological evidence indicates that women are twice as
likely to suffer from PTSD than men (Rowe, Sperlich, Cameron,
and Seng, 2014). McGovern et al. (2015) assert that PTSD is
more likely to affect individuals with co-occurring substance
use disorder. Co-morbidity rates are significantly increased
when patients suffer from both PTSD and substance use
disorder (McGovern et al., 2015).
Analysis of a Randomized Controlled Design
A randomized control trial (RTC) is an experimental design in
which subjects are randomized into distinct groups with the aim
of isolating variables to make a comparative analysis and
establish the efficacy of each variable. Controlled experiments
are considered the gold standard for establishing cause and
effect (Polit & Beck, 2017). I selected a single-blind RCT
which analyzed treatment modalities for patients with PTSD and
co-occurring substance use disorder. The study isolated and
analyzed three treatment variables; standard care, integrated
cognitive behavioral therapy plus standard care, and individual
addiction counseling plus standard care. The results of this RCT
determined that cognitive behavioral therapy was most effective
for treating symptoms of PTSD. However, cognitive behavioral
therapy and individual counseling were similarly effective for
treating substance abuse disorder. Both cognitive behavioral
therapy and individual counseling combined with standard care
45. were superior to standardized care alone in treating PTSD
symptoms and substance abuse (McGovern et al., 2015).
I believe that the randomized control design was
appropriate for this research because the goal was to establish
cause and effect of various treatment modalities for PTSD with
co-occurring substance abuse. RTCs are well suited to isolate
the effects of distinct components of complex interventions, and
to measure the effectiveness of the interventions against one
another (Polit & Beck, 2017). Moreover, the randomization of
participants helped to mitigate variations of genetic, behavioral,
and environmental differences amongst the participants.
Blinding is a method used to prevent biases which occur from
people being aware that they are being observed. To ensure
optimal results, the designers of this study did not tell the group
of patients receiving the intervention they were being studied,
however, the participants administering the interventions were
aware of the study. If only one group is unaware of the study, it
is referred to as being a single-blind study, as opposed to a
double-blind study in which both the group administering the
intervention and the group receiving it are unaware of the
research (Polit & Beck, 2017). One drawback to this design can
be that there is no significant difference between the
interventions. This research found no statistical difference
between treatment interventions for substance abuse, but did
conclude that one intervention was superior for PTSD.
Therefore I think the design was well suited and yielded
evidentiary treatment recommendations.
Analysis of a Quasi-Experimental Design
The quasi-experimental design measures an
intervention, but lacks randomization, and sometimes even lack
a control group. However, its defining characteristic of is the
lack of randomization (Polit & Beck, 2017). I examined a quasi-
experimental study which aimed to test the effectiveness of a
trauma-specific, psycho-educational intervention for pregnant
women with a history of abuse-related PTSD on six-intrapartum
and post-partum psychological outcomes. This quasi-
46. experimental research employed the nonequivalent control
group, pre-test post-test design. Women voluntarily entered the
study by responding to an advertisement or accepting a referral
from their medical provider. The research concluded that the
educational intervention provided clinical benefits including
improved labor experience, less post-partum PTSD and post-
partum depression, and decreased bonding impairment (Rowe,
Sperlich, Cameron, & Seng, 2014).
I believe that this was an appropriate research design for this
study because it facilitated the recruitment and retention of
participants from a vulnerable group. The quasi-experimental
design was strong in this case because it compared similar
patient groups before and after the intervention concluding that
differences in outcomes were directly attributable to the
intervention. However, this design is vulnerable to selection
bias, in that the groups were not comparable before the study
(Polit & Beck, 2017). However, because the participants in this
study suffered from abuse-related PTSD, this limitation was not
applicable to this research.
Consequences of Inappropriate Research Designs
It is imperative to select an appropriate research design
because the design of the study has a significant impact on the
quality of the results yielded from the research. When the
research aims to establish causal relationships, the design is
more important than any other methodological factor. Various
research designs have distinct strengths and weaknesses, and it
is up to the researchers to determine which one is most
appropriate for their research question. For therapy questions,
experimental designs are the gold standard, while the RCT
design is best suited to establish cause and effect. If a
researcher chooses a RCT design to answer a therapy question,
the quality of the results will suffer, and the question may not
even be answered (Polit & Beck, 2017). The goal of the
research is to answer questions, but, selecting an inappropriate
research design could lead to more questions than answers.
47. References
McGovern, M. P., Lambert-Harris, C., Xie, H., Meier, A.,
Mcleman, B., & Saunders, E. (2015). A randomized controlled
trial of treatments for co-occurring substance use disorders and
post-traumatic stress disorder. Addiction,110(7), 1194-1204.
doi:10.1111/add.12943
Polit, D. F., & Beck, C. T. (2017). Nursing research generating
and assessing evidence for nursing practice. Philadelphia:
Wolters Kluwer.
Rowe, H., Sperlich, M., Cameron, H., & Seng, J. (2014). A
quasi‐experimental outcomes analysis of a psychoeducation
intervention for pregnant women with abuse‐related
posttraumatic stress. Journal of Obstetric, Gynecologic &
Neonatal Nursing,43(3), 282-293. doi:10.1111/1552-6909.12312
Case 1.3 Just for Feet, Inc.
TABLE OF CONTENTS
Issues 1
Facts 1
Analysis 1
Conclusions 6
Bibliography 8
Issues
• Prepare common-sized balance sheet and income
statements for Just for Feet for the period 1996-1998. Also
compute key liquid, solvency, activity, and profitability ratios
for 1997 and 1998. Given these data, comment on what you
believe were the high-risk financial statements items for the
1998 Just for Feet audit.
• Just for Feet operated large, high-volume retail
48. stores. Identify internal control risks common to such
businesses. How should these risks affect the audit planning
decisions for such a client?
• Just for Feet operated in an extremely competitive
industry, or subindustry. Identify inherent risk factors common
to business facing such competitive conditions. How should
these risks affect the audit planning decisions for such a client?
• Prepare a comprehensive list, in a bullet format, of
the risk factors present for the 1998 Just for Feet audit. Identify
the five audit risk factors that you believe were most critical to
the successful completion of that audit. Rank these risk factors
from least to most important and be prepared to defend your
rankings. Briefly explain whether or not you believe that the
Deloitte auditors responded appropriately to the five critical
audit risks factors that you identified.
• Put yourself in the position of Thomas Shine in this
case. How would you have responded when Don-Allen
Ruttenberg asked you to send a false confirmation to Deloitte &
Touche? Before responding, identify the parties who will be
affected by your decision.
Facts
Just for FEET, INC was started in Birmingham, Alabama in
1988. South African entrepreneur Harold Ruttenberg believed
the market for athletic shoes was vulnerable to a new business
model. He was right, and ten years later his “store-within-a-
store” model had 300 locations and sales just shy of $775
million (Knapp, 2015). Impressively, Just for FEET continued
to increase profits and sales in the late 1990s in spite of similar
companies struggling in the increasingly competitive athletic
shoe retail market. While continuing to promote the prospects
of the company, Harold, his wife, and his son all sold much of
their stock in the company in 1996. Three years later, Harold
resigned as CEO and was replaced by a recovery expert after
Just for FEET defaulted on a large interest payment (Knapp,
2015). Shortly after, the company filed for bankruptcy, which
lead to investigations of both Just for FEET and their
49. independent auditors, Deloitte & Touche. Many of the senior
executives at Just for FEET were found guilty of intentionally
misstating inventory values as well as improperly inflating
revenue in a variety of ways. The top two auditors on the
engagement were suspended and Deloitte & Touche was fined
$375,000 by the SEC for ignoring obvious red flags over the
course of the engagement (Knapp, 2015). Perhaps the biggest
red flag was the “huge increase in vendor allowance receivables
between the end of fiscal 1997 and fiscal 1998” (Knapp, 2015,
p. 48). Deloitte sent receivables confirmations to Just for
FEET’s suppliers to confirm the amounts, but the executive vice
president at Just for FEET convinced many of the suppliers to
sign the confirmations even though the amounts had been
artificially inflated. Eight of the 13 confirmations that were sent
back to Deloitte in non-standard letters with ambiguous
statements and information, but Deloitte accepted the
confirmations as valid anyways.
Analysis
• Prepare common-sized balance sheet and income
statements for Just for Feet for the period 1996-1998. Also
compute key liquid, solvency, activity, and profitability ratios
for 1997 and 1998. Given these data, comment on what you
believe were the high-risk financial statements items for the
1998 Just for Feet audit.
Common-size balance sheet
Common size balance sheet shows both the numerical values
and the percentage of each account in relation to the total assets
and total liabilities. It makes easier to analyze the chance of a
company’s balance sheet over multiple time periods. A
common-size balance sheet provides the financial position of a
company.
To prepare a common size balance sheet for Just for Feet Inc for
1997-1999, each of the asset were converted to the equivalent
common-size amount by dividing the value of the asset by the
value of the total assets and multiplied with 100, then a
percentage of asset value is determined. Same way was used for
50. Liabilities, each individual liability was divided by the total
liabilities and shareholder’s equity value and multiplied by 100.
The Just for Feet balance sheet shown in Exhibit 1 summarizes
the common-size equivalents calculations for cash and cash
equivalents and repeat the calculation for each of the assets and
liabilities amounts from 1997 to 1999. The items that stand out
in 1999 balance sheet as being potentially problematic are: Drop
in cash equivalents from 36.9% of assets in 1997 to 1.8% in
1999; Increase in inventory from 35.5% of assets in 1997 to
58% in 1999; Increase in Accounts Payables from 10.3% of
liabilities in 1997 to 14.46% of liabilities in 1999; Increase in
Long Term debt from 2.8% in 1997 to 33.5% in 1999.
Common-size income statement
The common-size income statement for Just for Feet Inc was
prepared by converting each of expenses listed to the equivalent
common-size amount by dividing the value of expenses by the
value of the total revenues. The calculation of the cos of sale
was performed using cost of sale value and total sale value
multiplied by 100. Each expense was divided by the net sales as
denominator to get the percentage on sales.
The exhibit 2 shows a summarization of the common size
equivalent calculation in the income statement. The item that
stand out in the income statement as being potentially
problematic are subtle, but they are meaningful when one
considers that the company has very low net profit margins
(ranging from 5% in 1997 to 3% in 1999). Increase in store
operating cost from 27% of sale in 1997 to 30% in 1999.
Key Ratios for liquidity, solvency, activity and profitability
ratios for 1998 and 1999
• Key liquidity ratios include the current ratio and the
quick ratio:
• Current Ratio was calculated by dividing the current
asset by current liabilities
Current ratio 1997
=
Current Asset 1997
52. 155,706
=
2.00
• Quick ratios were calculated by dividing the sum of
cash and equivalents, marketable securities and account
receivable and other current assets (if they are liquid) by
current liabilities.
Quick ratio 1997
=
Cash and Eq. + Marketable sec. + Accts. Rec. + Other Current
Assets
Current Liabilities
=
138,785+33,961+6,553+2,121
146,914
=
181,420
53. 146,914
=
1.235
Quick ratio 1998
=
Cash and Eq. + Marketable sec. + Accts. Rec. + Other Current
Assets
Current Liabilities
=
82,490+0+15,840+6,709
155,706
=
105,039
54. 155,706
0.67
• Key solvency ratios include debt-to-assets, time
interest earned:
• Debt to Equity ratio was calculated by dividing the
total debt by total assets. It is a ratio of debt over the equity.
Debt-to-Assets 1997
=
Long term Debt + Current Liabilities
Total Assets
=
10,364 + 146,914
375,834
=
157,278
375,834
=
0.42
55. Debt-to-Assets 1998
=
Long term Debt + Current Liabilities
Total Assets
=
24,562 + 155,706
448,352
=
180,268
448,352
=
0.40
• Times-interest-earned was calculated by dividing
earnings before interest and taxes by interest charges.
56. Time-Interest-Earned 1997
=
Earnings before Taxes + Interest Expenses
Interest Expenses
=
24,743 + 832
832
=
25,575
832
=
30.7
Time-Interest-Earned 1998
=
Long term Debt + Current Liabilities
57. Total Assets
=
34,220 + 1,446
1,446
=
35,666
1,446
=
24.7
• Activity ratios include inventory turnover, age of
inventory, accounts receivable turnover, and total assets
turnover:
• Inventory turnover ratio was calculated by dividing
the cost of goods sold by the average inventory for the period.
Inventory Turnover 1998
=
COGS 1998
59. 147,526
133,323
=
1.11
• Accounts receivable turnover was calculated by
dividing sales by average account receivable.
Account Receivable Turnover 1998
=
Sales 1998
(Acc. receivable for 1997 + Acc. Receivable for 1998)/2
=
478,368
(6,553 + 15,840)/2
=
478,368
11,197
=
60. 42.72
Account Receivable Turnover 1997
=
Sales 1997
Account receivable for 1997
=
256,397
6,553
=
39.13
• Total Asset turnover was calculated by dividing net
sales by average total assets
Total asset Turnover 1998
=
Net Sales 1998
(Total Assets 1997 + Total Assets 1998)/2
=
62. 0.68
• Profitability Ratios include profit margin on sales and
return on total assets:
• Profit margin on sales is calculated by dividing net
income by net sales.
Net Profit Margin 1997
=
Net Income
*100
Sales
=
13,919
*100
256,397
=
5.43%
Net Profit Margin 1998
=
63. Net Income
*100
Sales
=
21,403
*100
478,638
=
4.47%
• Return on total assets was calculated by dividing net
income plus interest expenses by average total assets.
Return on Total Assets 1998
=
Net Income 2018 + Interest Expense 2018
(Total Assets 1998 + Total Assets 1997)/2
=
64. 21,403 + 1,446
(448,352 + 375,834)/2
=
22,849
412,093
=
0.055
Return on Total Assets 1997
=
Net Income 2017 + Interest Expense 2017
Total Assets 1997
=
13,919 + 832
375,834
65. =
14,751
375,834
=
0.039
Based on the above calculations I can state that several red flags
appear for different items in Just for Feet Inc:
Inventory Item:
• Inventory increased from 35.5% of asset in 1997 to
58% of asset by 1999.
• Inventory was growing much more rapidly than other
financial statement items.
• The age of the inventory went from 218 days to 241
days from 1998 to 1999, raising concern about obsolescence
issues.
Cash:
• Client’s cash resources dwindled considerably from
37% of assets in 1997 to less than 2% by 1999. In absolute
amounts, cash dropped from $138.7 M to $12.4 M the same
timeframe.
• According to the cash flow statement, FEET had
negative operating cash flow each year from 1997 to 1999.
• The company’s quick ratio was 0.37 in 1999, down
from 0.67 at 1997
Debt:
• Just for Feet Inc’s long-term debt increased sharply in
FY 1999, the long-term debt ratio rose from 0.09 at the end on
1998 to 0.71 at the end of 1999.
Relative Growth Rates for Ratios:
• Inventory and accounts payables growth should track
66. each other. In this case inventory grew more than 200% from
1997 to 1999, while accounts payable increased a more modest
157%.
• While Just for Feet Inc’s gross margin remained
relatively stable from 1997 to 1999, this seems suspicious as
many of the Company’s financial ratios deteriorated during the
same timeframe.
• Just for Feet operated large, high-volume retail
stores. Identify internal control risks common to such
businesses. How should these risks affect the audit planning
decisions for such a client?
Large, high-volume store create unique auditing challenges one
of them is revenue recognition where a large number of
transactions (particularly in a business where training tends to
be minimal and employee turnover is usually high), increases
the likelihood that a number of transactions are incorrectly
processed. This would increase further if the store used any
number of promotional deals such as buy one get one free
transaction. On the other hand, cash may be used for a
disproportionate amount of transactions, creating additional
opportunities for skimming at the register.
In the case of Expense/Inventory Recognition a large portion of
inventory in the store was easily accessible to both customers,
and employees increase the risk of theft or shrinkage.
Also, the multiple display approach for shoes – by brand, by
function etc., complicated the any physical inventory process
and the associated controls.
Organization was very decentralized in terms of store
operations; further complicates the process of ensuring that
financial controls are adequate and consistent across the
organization and organizations also creates opportunities for
less senior management to potentially take advantage of the lack
of central oversight.
As control issues become more complex, so does the difficulty
of conducting an effective audit. In a decentralized, high-
67. volume, retail organization, a prudent auditor would increase
their sampling methods for audit tests as a way of reducing the
risk of overlooking a problem.
• Just for Feet operated in an extremely competitive
industry, or subindustry. Identify inherent risk factors common
to business facing such competitive conditions. How should
these risks affect the audit planning decisions for such a client?
Retail business present a number of unique challenges in terms
of establishing internal controls, large number of transactions,
cash transactions, employee turnover etc. These challenges are
made more complex when a retailer operates in a highly
competitive sector or retailing such as trendy clothing or
athletic shoes.
Inventory can quickly become obsolete, and it would impact
negatively on the difficulty to predict the correct amount of
inventory to maintain and also contribute that forecasting the
margin at which that inventory will sell become more difficult.
Obsolete inventory and reduce margin sales may have a
negative impact on cash flow and increase the need for
additional financing beyond plan. In a decentralized
organization, store and district level management may seek to
dress up their financial reports in order to maintain their
chances of receiving the best inventory.
In the case of any additional financing were needed above plan
run the risk of violating debt covenants or sources of vendor
financing particularly if sale of a certain trend do not go as
planned.
Other aspect is that turnover in management (particularly at the
store level) both within the company and between companies,
may further complicate ability of an auditor to correctly assess
a firm’s financial status.
• Prepare a comprehensive list, in a bullet format, of
the risk factors present for the 1998 Just for Feet audit. Identify
the five audit risk factors that you believe were most critical to
the successful completion of that audit. Rank these risk factors
from least to most important and be prepared to defend your
68. rankings. Briefly explain whether or not you believe that the
Deloitte auditors responded appropriately to the five critical
audit risks factors that you identified.
The text cites a number of issues that may have been audit risk
factors for Just for feet Inc in its 1998 audit:
• Management style and approach to managing Investor
Expectations. Management was particularly interested in its
short-term share price as a measure of its success or failure,
management placed significant emphasis on meeting short-term
earning goals, go big or go home approach towards expansion
even if changes in the business environment warranted a more
moderate approach and dominant personality of CEO.
• General retail sector risk. Decentralized management
approach in industry known to have factors, high-volume of
transactions, large amount of transactions conducted in cash,
significant employee turnover, and ease of customer and
employee access to inventory (shrinkage and theft).
• Highly-competitive subsector of retailing. Trend-
driven merchandise increases likelihood of incorrect ordering,
incorrect pricing and/or a significant chance of obsolescence,
rapid change in trends make it more difficult to recognize and
respond to problems, and long lead times for inventory orders
reduce operating flexibility.
• Financial Condition Flags/Concerns. Large increase
in inventory in proportion to historic norms, consistently
negative operating cash flow (indicating a continued need to
raise capital and to keep reporting results that will attract
investors), increase in vendor allowance receivable, slow
growth of accounts payable relative to inventory gains, increase
in financial leverage, declining cash on balance sheet and
consistently steady gross and operating margins in a business
that has a meaningful level os fixed costs and that is highly
seasonal in terms of sales.
Of the factors listed above, the five factors that would likely
increase the likelihood of potential problems at Just for Feet Inc
in 1998 are:
69. • Consistently negative operating cash-flow indicate
that reported results are not self-sustaining and that the
company may well need new financing.
• Large increase in inventory could suggest that
company failed to correctly identify a number of trend and that
it has a significant amount of inventory that would require a
write-down.
• Declining cash on the balance sheet in a business
where high inventory turnover and favorable supplier credit
terms could potentially result in a negative working investment
requirement.
• Management’s dogged focus on meetings short-term
investor expectations and maintaining a high share price
regardless of market conditions.
• Consistenly steady quartely gross and operating
margins in a business that would be expected to be highly
seasonal in sales and with a meaninful level of costs that do no
fluctuate seasonally.
• Increase in vendor allowance receivable, without
standard supporting documentation.
Deloitte appears to have been cognizant of the potetial audit
risk at Just for feet Inc; The auditor took steps to increase
senior management oversight on its high risk accounts and
identified vendor alowances as a potential issue for all audit
clients.
Where Deloitte fell short was being persuaded by Just for Feet
Inc management to accept the non standars vendor allowance
letters and other explanations, for plrblems in the business.
Deloitte should have followed through with its concern to the
Board of Directors and the Audit Committee and perhaps
included some commentary in its audit report.
• Put yourself in the position of Thomas Shine in this
case. How would you have responded when Don-Allen
Ruttenberg asked you to send a false confirmation to Deloitte &
Touche? Before responding, identify the parties who will be
affected by your decision.
70. • Shine should have rejected Ruttenberg’s request.
Shine need to explain the situation to Ruttenberg regarding
ethical issues, and impact of this false confirmation.
• Although Just for Feet Inc was likely a large
customer, Shine had a responsibility to his Board and
shareholders.
• Shine is clearly liable for abetting the fraud. Shine
should have reported the request to Just for Feet Inc’s audit
committee as well as its auditors.
• Shine should also have made the information
available to his Board and auditors as Ruttenberg’s request
would likely have an impact on Shine’s firm audit as well.
Conclusions
While earnings increased and the company's current ratio
increased from 1997 to 1998, the company's operations
generated an increasing deficit cash flow level; and the
company's current liquidity index shows a lack of any liquid
resources relative to the current level of debt due. The
company is in a significant liquidity crisis.
Bibliography
Gartland, D. J., C.P.A. (2017). The importance of audit
planning. Journal of Accountancy, 224(3), 14-15. Retrieved
from http://ezproxy.liberty.edu/login?url=https://search-
proquestcom.ezproxy.liberty.edu/docview/1933270057?accounti
d=12085
Jensen, M. C. (1993). The modern industrial revolution, exit,
and the failure of internal control systems. the Journal of
Finance, 48(3), 831-880.
Knapp, M. (2015). Contemporary Auditing: Real Issues and
Cases. Boston: Cengage Learning.
Laksmana, I., & Yang, Y. (2015). Product market competition
and corporate investment decisions. Review of Accounting &
Finance, 14(2), 128-148. Retrieved from
80. Total liabilities and
shareholders’ equity
689,396
100%
448,352
100%
375,834
100%
Exhibit 1
JUST FOR FEET, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (000S
omitted)
year Ended January 31,
