Subject: Assessment of Krispy Kreme Doughnuts Incorporation
\n1.1 History and Products of Krispy Kreme Doughnuts Incorporation
\nKrispy Kreme was founded by Vernon Rudolph in Marshall County and originally commenced with a doughnut method, a pack of cigarettes and a dream.\u00a0 Even though from its creation the firm has frequently encountered business hardships due to economic and competitive conditions, they still manage to enter the market and build a good reputation.\u00a0 Indeed in 1949 a laboratory was created in order to enhance product originality and quality (Arai J. et al. 2004).<\/p>\n
Krispy Kreme is a leading corporation engaged in the wholesaling and retailing of high quality doughnuts.\u00a0 From its inception in 1937 to date the organization have always strived to provide a variety of doughnuts to meet all the wants of its target clients.\u00a0 Presently over 20 varieties are being marketed.\u00a0 A number of beverage programs, like different kinds of coffee, where introduced in the product range of the company to complement the original good marketed.\u00a0 The principal main distribution channels through which sales revenue is generated are the Company Stores, Franchise Fees and a number of supply chains attained through vertical integration (Securities Information, p 3-4).
\nThe firm\u2019s premises are both a manufacturing plant as well as retail outlets, on which on-premises company sales are generated.\u00a0 Get research paper samples and course-specific study resources under\u00a0 \u00a0homework for you course hero writing service – Manage ment has also developed a number of distribution channels, like convenience stores, groceries and more, through which off-premises company sales are attained (Securities Information, p 3).
\nLong ago the organization has noted a key managerial technique in which they can think globally and act locally.\u00a0 In this respect a number of franchising agreements had been set in order to widen the market of the firm and enhance the revenue growth.\u00a0 A vertical integration of supply chains was also carried out, managed under KK Supply Chains.\u00a0 KK Supply Chain originate sales revenue from sale of doughnut mixes, equipment and coffee to franchisees and attains both the firm and the aforesaid franchisees via product knowledge and technical proficiency, together with appropriate control on critical production and distribution processes (Securities Information, p 4).\u00a0Read about\u00a0open access good example
\n1.1.1\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Principle Officers of Krispy Kreme Doughnuts
\nThe main officers of the organization are (Securities Information, p 124):
\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 James H. Morgan \u2013 Chairperson of board of directors
\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Daryl G. Brewster \u2013 Chief Executive Officer
\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Michael C. Phalen \u2013 Chief Financial Officer
\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Douglas R. Muir \u2013 Chief Accounting Officer
\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Charles A. Blixt \u2013 Director
\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Robert S. McCoy Jr. \u2013 Director
\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Andrew J. Schindler \u2013 Director
\n1.2 Audit Risks
\nThere are a number of audit risks that ought to be considered before accepting this client.\u00a0 These are explained in the sub-sections below.
\n1.2.1 Adhering to Relevant Legislations
\nThe products marketed by Krispy Kreme Doughnuts Incorporation are subject to food product regulation.\u00a0 For instance product weight, packaging, content and other factors are periodically investigated to ensure compliance.\u00a0 It has been noted that presently the corporation is subject to governmental investigations for a number of incidents.\u00a0 For example, \u00a0\u00a0on 12th May 2004, the claimant alleged that between August 2003 and May 2004 the organization conducted certain activities in violation of sections 10(b) and 20(a) of the Exchange Act and legal proceedings commenced on such case (Securities Information, p 27).
\nDue to the aforementioned investigations the issue of contingent liabilities comes into force.\u00a0\u00a0 The auditor is required to increase the audit tests on contingencies in order to control the detection risk (ACCA Paper 6, 2000, p 335).\u00a0 Apart from involving additional work, there is the risk that something remains undetected that can materially affect the truth and fairness of the financial statements. In fact the organization frequently incurs litigation costs arising from such incidents as portrayed in the past two years income statements of the firm.
\n1.2.2 Reliance on Franchisees
\nThe sales revenue of the organization relies heavily on the franchisees, who are independent contractors and do not comprise employees of Krispy Kreme Doughnuts Incorporation.\u00a0 Disputes that may arise with these entities may lead to a significant negative effect on the financial health of the company (Securities Information, p 19).\u00a0 Therefore a risk element present in this area is that the firm\u2019s profitability is vulnerable to such negotiations plus legal proceedings may occur directing to contingent liabilities.\u00a0Read about\u00a0Doughnut Industry
\n1.2.3 Sales generated from Company Stores
\nThe highest proportion of sales generated by the company arises from the corporation\u2019s stores.\u00a0 In 2006 – Write a paper; Professional research paper writing service – Best essay writers, it amounted to 73% of the total sales revenue.\u00a0 A section of this sales category is generated from in-house retail outlets in the firm\u2019s premises.\u00a0 In this division the majority of the sales made from clients comprise cash sales.\u00a0 As a result a high amount of sales will be on cash leading greater scope to understatement of sales and\/or theft of cash (U.S. Government Accountability Office).\u00a0 Therefore a high inherent risk on sales will arise due to the nature of the transaction.
\n1.2.4 Industry and Market Risk
\nThe market in which the organization operates is very dynamic and subject to client\u2019s tastes and preferences, which are susceptible to change.\u00a0 The continuous movement for dietary and health preferences is also influencing the type of doughnuts that the organization ought to focus on.\u00a0 Such changes in the product mix can significantly influence the sources of income and the profit elements of the firm.\u00a0 Indeed presently doubts about the ability of Krispy Kreme Incorporation to get back on her feet from the worrying losses is in doubt (Hogan M. 2006 – Write a paper; Professional research paper writing service – Best essay writers). As a result, the applicability of analytical procedures on the income statement would diminish necessitating during the audit fieldwork necessitating more detailed substantive tests on such area (Jiambalvo J, 2001, p 99).
\n1.2.5 The Get research paper samples and course-specific study resources under\u00a0 \u00a0homework for you course hero writing service – Manage ment of Krispy Kreme Doughnuts Incorporation
\nThe firm\u2019s executive management holds considerable reputation and experience in the business area the organization is employed in (Gogoi P. 2006 – Write a paper; Professional research paper writing service – Best essay writers).\u00a0 Concern about internal control procedures shown by management, reveal for instance that a good control environment exists sustained by managers.\u00a0 Thus the risk of fraud induced from top management is remote and there is a high probability of appropriate cooperation from such parties with the audit team.\u00a0 This is a very positive feature on this client.
\n1.3 Financial Health of Krispy Kreme Doughnuts Incorporation
\nKrispy Kreme Doughnuts Incorporation financial health is presently very weak as portrayed by the accounting ratios measured in Exhibit A.\u00a0 The firm is facing losses, together with negative net current assets.
\nFurther amplification of these categories reveals that even though negative profits, the efficiency of management in generating lower losses from the resources employed in the organization improved by a reduction in the return on capital employed of 29.67%.\u00a0 The losses generated from every $100 of sales also decreased by 15.83% indicating better control on costs.\u00a0 In addition, the gross profit margin shows that if proper cost exercises are conducted, the firm can attain profits, since a good 15.57% gross profit margin is derived from every $100 sales (Weetman P. 2003, p 365-366).
\nA slight development in the financial position occurred by a small improvement in the ability of the current assets to cover the current liabilities.\u00a0 The most liquid assets also improved as shown by the Quick Ratio (Lewis R. et al 1996, p 382-383).\u00a0 This may be the result from better working capital management, such as a decrease in the time taken to collect money from trade debtors.\u00a0 However, the net current assets are still negative revealing that the current assets of the firm are not capable to cover all the current liabilities, which is a serious issue.
\nThe capital structure of the organization comprises one of a low-geared company.\u00a0 This means that the ratio of debt is in a lower proportion than equity.\u00a0 Low-geared companies are considered as less risky corporations due to lower interest commitments.\u00a0 Yet the ability of the firm to cover interest expenses out of profits is critical because the enterprise is operating at a loss (Weetman P. 2003, p 369).\u00a0 It is imperative that profitability further improves in order to recover the stability of the organization as it happened from 2005 to 2006 – Write a paper; Professional research paper writing service – Best essay writers.
\nOverall the company\u2019s financial health is improving as shown by the time series analysis conducted in Exhibit B.\u00a0 However there are still significant doubts on the company\u2019s going concern, because if an adverse unexpected business factor happens, the firm may face bankruptcy.\u00a0 This is a serious audit issue, because important features of the financial statements upon which we conduct our audit opinion will be the going concern assumption of the organization (ACCA Paper 6, 2000, p 104).
\n1.4 Recommendation of Client Write a word essay – Evaluate d
\nThe audit risk evaluation of Krispy Kreme Doughnuts Incorporation revealed the following positive and negative features:
\nPositive Features
\nNegative Factors
\nExecutive management of the company holds a good reputation.
\nHigh reliance on Franchisees.
\nRisk of understatement of sales and cash.
\nHigh market risk.
\nWeak financial health.
\nIn view of the audit risks mentioned in the table above one can note that the issues of the organization are significant and substantial audit work needs to be carried out by the auditor in order to minimize the overall audit risk.\u00a0 However at this stage, we cannot fully ascertain the value of the audit risk of Krispy Kreme Incorporation\u2019s audit.\u00a0 For instance we have not yet conducted a preliminary review of the internal controls of the firm through discussions with management on such matter (ACCA Paper 6, 2000, p 130).\u00a0 This hinders us from providing an accurate value of the control risk.
\nSubstantial information was gathered for the other uncontrollable risk, commonly known as inherent risk.\u00a0 Indeed with respect to such factor we can provide a reliable assessment.\u00a0 However, it is also necessary to conduct discussions with management with respect to the audit to obtain a better understanding of their willingness and value provided to the intended audit.
\nAn overall estimate that can be provided from the information gathered on the audit risk elements is portrayed below:
\nOverall Audit Risk:
\nInherent Risk (High) x Control Risk (Medium) x Detection Risk (Low)
\nThe detection risk is considered high because it is the only variable that can be influenced by the auditor.\u00a0 If the other risks are assessed a high figure, then it is imperative that the auditor increases the amount of substantive procedures in order to minimize the risk that a substantive test will not detect a material error or misstatement (ACCA Paper 6, 2000, p 97).\u00a0 In this respect, we should not reject the audit of Krispy Kreme Incorporation solely on grounds of high inherent risk.\u00a0 We ought to evaluate the overall audit by considering factors such as availability of time during the audit and other risk factors.\u00a0 For example, control risk appears to be moderate, thus compensating for a lower overall audit risk.\u00a0 At this stage, I suggest that further investigation and discussions should be carried out in order to obtain more information on the audit and thus be capable to take a decision based on more concrete evidence.
\nExhibit A \u2013 Determination of Accounting Ratios
\nProfitability
\nLiquidity
\nStability
\nExhibit B \u2013 Time Series Analysis
\nReferences:
\nAAT Unit 17 Interactive Text (2004).\u00a0 Implementing Auditing Procedures. New York:\u00a0 BPP Publishing Limited.
\nACCA Paper 6 Study Text (2000). The Audit Framework International Stream. Fourth Edition. New York: BPP Publishing Limited.
\nArai J.; Shay W.; Robinson F. (2004). Krispy Kreme Doughnut Corporation Records, American History (on line). Available from: http:\/\/americanhistory.si.edu\/archives\/d7594.htm (Accessed 26th April 2007).
\nGogoi P. (2006 – Write a paper; Professional research paper writing service – Best essay writers). A Taste for Tim Hortons?, Businessweek.com (on line). Available from: http:\/\/www.businessweek.com\/investor\/content\/mar2006 – Write a paper; Professional research paper writing service – Best essay writers\/pi2006 – Write a paper; Professional research paper writing service – Best essay writers0321_777334.htm (Accessed 26th April 2007).
\nHogan M. (2006 – Write a paper; Professional research paper writing service – Best essay writers). Can Krispy Kreme Rise Again?, Businessweek.com (on line). Available from: http:\/\/www.businessweek.com\/investor\/content\/mar2006 – Write a paper; Professional research paper writing service – Best essay writers\/pi2006 – Write a paper; Professional research paper writing service – Best essay writers0307_732175.htm?campaign_id=nws_insdr_mar10&link_position=link7 (Accessed 26th April 2007).
\nJiambalvo J.; Kennedy J. (2001). Analytical Procedures and Audit Planning Decisions, Journal of Accountancy, Vol. 191, Issue 2.
\nLewis R.; Pendrill D. (1996). Advanced Financial Accounting. Fifth Edition. London: Pitman Publishing.
\nSecurities Information. Krispy Kreme Doughnuts Incorporation (on line). Available from: http:\/\/www.secinfo.com\/d14qfp.uUm.htm (Accessed 26th April 2007).
\nU.S. Government Accountability Office. Field Work Standards for Performance Audits (on line). Available from: http:\/\/www.gao.gov\/govaud\/ybhtml\/doc6.html (Accessed 26th April 2007).
\nWeetman P. (2003). Financial and Get research paper samples and course-specific study resources under\u00a0 \u00a0homework for you course hero writing service – Manage ment Accounting. Third Edition. England: Pearson Education Limited.
\n\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"
Subject: Assessment of Krispy Kreme Doughnuts Incorporation 1.1 History and Products of Krispy Kreme Doughnuts Incorporation Krispy Kreme was founded by Vernon Rudolph in Marshall County and originally commenced with a doughnut method, a pack of cigarettes and a dream.\u00a0 Even though from its creation the firm has frequently encountered business hardships due to economic […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5671,5664,5668,5665,5672,5667,5669,5670,5673,5666],"tags":[5676,5681,5680,5675,5674,5677,5678,5679,4639],"class_list":["post-14157","post","type-post","status-publish","format-standard","hentry","category-1500-words-assessment-brief","category-ace-homework-tutors","category-create-a-4-6-page","category-discussion-assignment","category-do-my-assignment-for-me-online-write-academic-papers","category-for-this-assignment-you-will-write-a-paper","category-help-write-a-word-paper","category-need-expert-to-write-a-word-essay","category-online-homework-help-do-my-online-class-assignment","category-presentation-assignment","tag-1500-words-assessment-task","tag-ace-my-homework","tag-assignment-homework-help-homework-answers","tag-construct-a-5-to-6-page-paper","tag-create-a-2-4-page-resource","tag-create-powerpoint-include-harvard-referencing","tag-i-need-completed-essay-in-300-400-words","tag-use-the-assigned-reading-and-at-least-2-other-sources-to-discuss","tag-write-a-page-assignment"],"_links":{"self":[{"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/posts\/14157","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/comments?post=14157"}],"version-history":[{"count":0,"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/posts\/14157\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/media?parent=14157"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/categories?post=14157"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.colapapers.com\/us\/wp-json\/wp\/v2\/tags?post=14157"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}