Background Information:

In this project you are to assume that you are the audit partner on the audit engagement of Earthwear Clothiers, Inc. (Earthwear). Earthwear is a U.S. publicly traded company and is subject to the rules and regulations of the Public Company Accounting Oversight Board (United States). It is classified as an “accelerated filer” under the rules of the Securities and Exchange Commission (SEC).

Your firm has been engaged to perform an audit of the financial statements of Earthwear's calendar year ended December 31, 2017. Your audit will include:

-Issuance of an Engagement Letter

-Timely quarterly reviews

-An audit of Earthwear’s internal control over financial reporting

-An audit of Earthwear’s Financial Statements for the year then ended

-Issuance of a Management Letter concerning findings and recommendations

Earthwear has an audit committee of the board of directors charged with oversight of financial reporting and disclosure. While you are conducting your audit of Earthwear, you and your audit team are expected to meet with the audit committee on several occasions.

Required Task:

Prepare a calendar of your proposed meetings with the audit committee on a month by month basis. For each meeting you should identify the information (matters) that you should communicate to the audit committee.

On January 2, 2006, in the strategic committee meeting of the company, Christine Carmen Chairman, President and Chief Executive Officer said, we are optimistic about 2006 and the years beyond. The proposed projects presently under consideration will enable us efficiently to expand our productivity in order to meet ever-increasing customers demand with high quality engineered products and systems for defense, aerospace and industrial applications.

Carmen Corporation is a supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. The Company has three business segments.

The Company's Defense segment provides integrated front-line war-fighting systems and components, including electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems and airborne mine countermeasures systems.

The Company's Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing, communications and electronic warfare industries.

The Company's Engineered Materials segment supplies piezoelectric ceramic products for commercial and military markets and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper, and oil industries.

Carmen Corporation has the following financial statements:

Its established common stock’s dividend payout ratio after the preferred stock dividends payment is 50 percent and it is expected to grow at a constant rate of 9 percent in the future. The tax rate is 40 percent and investors requiring a rate of return of 15% on the common stock.

Preferred stock is trading at a price of $40 per share, with a dividend of $4.8. The 30-year long-term debt with a par value of $1,000 was issued 10 years ago with a coupon rate of 8%.  The bonds can be refinanced at the market interest rate of 10 percent today.

Carmen has the following investment opportunities:

Part I

Determine the book value and market value of the capital structure.

Determine the weighted average cost of capital (WACC) for each of the capital structure.

Calculate the internal rate of return (IRR) and Net Present Value of each project and compare them against the book value and market value weighted average cost of capital.

Are there any conflict between NPV and IRR? How do you resolve the conflict in ranking?

e.

How much of the internal fund is available for investments?

Are there any issues about the projects you should consider before yourrecommendation?

CARMEN CORPORATION

On January 2, 2006, in the strategic committee meeting of the company, Christine Carmen Chairman, President and Chief Executive Officer said, we are optimistic about 2006 and the years beyond. The proposed projects presently under consideration will enable us efficiently to expand our productivity in order to meet ever-increasing customers demand with high quality engineered products and systems for defense, aerospace and industrial applications.

Carmen Corporation is a supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. The Company has three business segments.

The Company's Defense segment provides integrated front-line war-fighting systems and components, including electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems and airborne mine countermeasures systems.

The Company's Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing, communications and electronic warfare industries.

The Company's Engineered Materials segment supplies piezoelectric ceramic products for commercial and military markets and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper, and oil industries.

Carmen Corporation has the following financial statements:

Its established common stock’s dividend payout ratio after the preferred stock dividends payment is 50 percent and it is expected to grow at a constant rate of 9 percent in the future. The tax rate is 40 percent and investors requiring a rate of return of 15% on the common stock.

Preferred stock is trading at a price of $40 per share, with a dividend of $4.8. The 30-year long-term debt with a par value of $1,000 was issued 10 years ago with a coupon rate of 8%. The bonds can be refinanced at the market interest rate of 10 percent today.

Carmen has the following investment opportunities:

Part I

Determine the book value and market value of the capital structure.

Determine the weighted average cost of capital (WACC) for each of the capital structure.

Calculate the internal rate of return (IRR) and Net Present Value of each project and compare them against the book value and market value weighted average cost of capital.

Are there any conflict between NPV and IRR? How do you resolve the conflict in ranking?

How much of the internal fund is available for investments?

Are there any issues about the projects you should consider before your recommendation?

​​​​​Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.

1. Which of the following is an example of finer information in the context of information production by firm managers?
   1. Additional line items in financial statements
   2. Future-oriented financial information incorporated in management discussion and analyses
   3. A “clean” audit report by a large established auditing firm
   4. Information that, if released, will adversely affect the firm’s future cash flows

2. According to the theoretical literature on disclosure and its determinants, the presence or absence of “externalities” play an important role. The literature states that the presence of externalities can cause firms to under-produce information. Which of the following statements describes “externalities” in the context of information production?
   1. When information that is disclosed is not used in the financial statements
   2. When the costs or benefits of disclosure are not borne by the producer of the information
   3. When information that is disclosed is not used for internal planning purposes
   4. When information produced has economic consequences

3. Which of the following statements describes the public interest theory of regulation?
   1. The regulator is motivated to maximize social welfare through regulation.
   2. The regulator is motivated to maximize his or her own utility.
   3. The regulator is democratically elected.
   4. The regulator is appointed by elected individuals.

4. One way investors can lower risk for a given expected return is to adopt a strategy of portfolio diversification of securities. How does this reduce portfolio risk?
   1. Systematic risk in the portfolio is reduced as the number of firms included in the portfolio increases.
   2. The number of firms in the portfolio is reduced to reduce the risk of the portfolio.
   3. Security returns across securities are not perfectly correlated.          4) All securities in the portfolio have the same risk.

5. The principle of diversification leads to an important risk measure (beta) in the theory of investment. Which statement about beta is correct?

1. Beta is used as a proxy for the firm-specific risk of a security.
2. Beta is a measure of the systematic risk of a security.
3. Beta measures the covariance of the price of a security and changes in the market value of the investor’s portfolio.
4. By definition, the beta of the market portfolio is zero.

6. Which of the following correctly represents “noise” in an information system?
   1. When prior probability is the same as posterior probability
   2. When prices do not react to earnings announcements
   3. When diagonal probabilities are large
   4. When off-diagonal probabilities are small

7. Which of the following indicates an efficient securities market in the semi-strong form?
   1. The prices of securities traded on that market at all times reflect all information that is publicly and privately known about those securities.
   2. The prices of securities traded on that market at all times reflect substantially all the information that is publicly known about those securities.
   3. The prices of securities traded on that market at most times reflect most information that is publicly known about those securities.
   4. The prices of securities traded on that market at all times reflect all information that is publicly known about those securities.

8. By introducing the concept of noise traders (or liquidity traders), the efficient securities market theory was extended to reconcile the concept of efficiency with the usefulness of financial accounting information. With noise traders, security prices are which of the following?
   1. Uninformative
   2. Fully informative
   3. Only partly informative
   4. Random

1. In 1970, Akerlof examined information asymmetry in the used car market. He argued that buyers do not have the information required to distinguish between “lemons” and good cars. Which of the following statements is correct?
   1. Buyers will lower the price they are willing to pay for any used car.
   2. Buyers will pay a lower price for lemons than for good quality used cars.
   3. Buyers will raise the price they are willing to pay for any used car. 4) Owners of lemons will withdraw from the used car market.

You have recently been hired as the assistant controller for Stanton Temperton Corporation, which rents building space in major metropolitan areas. Customers are required to pay six months of rent in advance. At the end of 2018, the company's president, Jim Temperton, notices that net income has fallen compared to last year. In 2017, the company reported before-tax profit of $330,000, but in 2018 the before-tax profit is only $280,000. This concerns Jim for two reasons. First, his year-end bonus is tied directly to before-tax profits. Second, shareholders may see a decline in profitability as a weakness in the company and begin to sell their stock. With the sell-off of stock, Jim's personal investment in the company's stock, as well as his company-operated retirement plan, will be in jeopardy of severe losses. After close inspection of the financial statements, Jim notices that the balance of the Deferred Revenue account is $120,000. This amount represents payments in advance from long-term customers ($80,000) and from relatively new customers ($40,000). Jim comes to you, the company's accountant, and suggests that the firm should recognize as revenue in 2018 the $80,000 received in advance from long-term customers. He offers the following explanation: “First, we have received these customers' cash by the end of 2018, so there is no question about their ability to pay. Second, we have a long-term history of fulfilling our obligation to these customers. We have always stood by our commitments to our customers and we always will. We earned that money when we got them to sign the six-month contract.”

Discuss the ethical dilemma you face:

1. What is the issue?

2. Who are the parties affected?

3. What factors should you consider in making your decision?

4. What is the stance you will take?

Required: 1) Reach a consensus concerning the answers to the four questions.

2) Write a memo to the company’s controller discussing the issue and the stance that your group is taking.

1. In 1980 France had a GDP of $325 billion francs and a population of 11.78 million. In 1980 the exchange rate was 1 US dollar was equal to 1.67 francs. In 2010, France had a GDP of $435 billion euros and a population of 21.75 million. In 2010 0.8 euros was equal to 1 US Dollar. The GDP deflator was 51 in 1980 and 125 in 2010. By what percentage did France’s Real GDP per capita rise between 1980 and 2010 in U.S. dollars?

2. Identify the most commonly cited measure of inflation in the United States and explain how it is calculated. Identify and briefly discuss the some of the problems that statisticians have paid considerable attention to in recent years (your answer needs to be thorough).

3. Describe the relationship between inflation levels in prices and inflation levels for prices, wages and interest rates with respect to their ability to affect people's economic status and business outcomes (again, here be thorough and explain what happens when wages, etc. does and does not keep up with inflation).

4. Explain the differences and similarities between the GDP deflator and the CPI. Be thorough in your answer and write in complete sentences.

5. What is Hyperinflation and what are some reasons it may occur and persist? What is deflation, when does deflation usually occur, and is deflation a good or bad thing? Give examples of when each scenario happened in history as well. Again, be thorough in your answer.

6. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 15 hot dogs and 8 hamburgers. A hot dog cost $2.25 in 2006 and $5.40 in 2007. A hamburger cost $5.75 in 2006 and $7.86 in 2007. Calculate the CPI for both years and then find the inflation rate.

7. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 25 sandwiches and 40 magazines. In 2006, a sandwich cost $4.50 and a magazine cost $3.99. In 2007, a sandwich cost $5.75. If the inflation rate in 2007 was 21 percent, then how much did a magazine cost in 2007?

8. When Anders took out his first two-year membership with Maxima Gym in 2004, the fee was $525.00. He renewed his membership three times; in 2006 for $580.00, in 2008, for $600.00, and again in 2010, for $699.00. What is the OVERALL rate of inflation for Anders' gym membership?

9. In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $2.4 million. A price index for nonresidential construction was 12 in 1949, 96 in 1987, and 117.5 in 2000. Calculate the value of the courthouse in 2000 dollars and the value of the hospital in 2000 dollars and compare your answers. Which one cost more?

10. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 156 in 2001 and 227.25 in 2006. What is Ruben's 2006 salary in 2001 dollars? What does this mean about how his purchasing power increased or decreased?

Conceptual Framework:

For each of the following situations, state whether you agree or disagree with the financial reporting practice employed, and then briefly explain the reason and proper treatment if you disagree. Use the conceptual framework as your guide in deriving your answer.

The controller of the Dumars Corporation increased the carrying value of land from its original cost of $2 million to its recently appraised value of $3.5 million.

The president of Vosburgh Industries asked the company controller to charge miscellaneous expense for the purchase of an automobile to be used solely for personal use.

At the end of its 2016 fiscal year, Dower, Inc., received an order from a customer for $45,350. The merchandise will ship early in 2017. Because the sale was made to a long-time customer, the controller recorded the sale in 2016.

At the beginning of its 2016 fiscal year, Rossi Imports paid $48,000 for a two-year lease on warehouse space. Rossi recorded the expenditure as an asset to be expensed equally over the two-year period of the lease.

The Reliable Tire Company included a note in its financial statements that described a pending lawsuit against the company.

The Hughes Corporation, a company whose securities are publicly traded, prepares monthly, quarterly, and annual financial statements for internal use but disseminates to external users only the annual financial statements.

Some of the account balances of Mali Company at December 31, 20x0 are shown below:

6% Preferred Stock ($100 par, 2,000 shares authorized)                 $    20,000

PCIEP, Preferred                                                                                    3,000

Common Stock ($10 par, 100,000 shares authorized)                   500,000

PCIEP, Common                                                                                100,000

Retained Earnings                                                                               304,000

Treasury Stock-Preferred (50 shares at cost)                                       5,500

Treasury Stock-Common (1,000 shares at cost)                          16,000

The price of the company’s common stock has been increasing steadily on the market; it was $21 on January 1, 20x1, advanced to $24 by July 1, and to $27 at the end of the year 20x1. The preferred stock was not openly traded, but was appraised at $120 per share during 20x1.

1)     Give the proper journal entries for each of the following occurred in 20x1:

(1)   The company resold the 50 shares of preferred stock held in the treasury for $116 per share.

(2)   On July 1, the company declared a 5% stock dividend to the common stockholders.

(3)   On October 15, the company declared a cash dividend of $100,000. Assume the preferred stock is non-cumulative. Prepare two separate journal entries: common and preferred dividends.

2) Prepare the stockholders’ equity section of the balance sheet at December 31, 20x1

Note that Walmart's fiscal year starts the first week of February. This means that when analyzing the data, week 41 is actually week 45(41+4 weeks for January) in 2003 or the beginning of November 2003. Also, week 52 is actually week 4 (52+4 weeks for January 2003 minus 52 weeks for 2003) in 2004 or the end of January 2004.

1. Identify spikes(outliers) in the data where extreme (high or low) sales values occur and correlate these spikes with actual calendar dates in 2003 or 2004 and with any holidays or special events or abnormally slow periods that may occur during these periods.