Case: Asher farms Inc. understanding of client's business environment by Mark S. Beasley
LEARNING OBJECTIVES
After completing and discussing this case you should be able to
[1] Describe the implications of an audit client's business environment on the audit engagement strategy
[2] Identify factors affecting an audit client's environment and related business risk
[3] Link business risk factors to the risk of material misstatements in financial statement accounts
INTRODUCTION
Asher Farms, Inc. is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. Asher Farms sells ice pack, chill pack and frozen chicken, in whole, cut-up and boneless form to retailers, distributors, and casual dining operators principally in the southeastern and southwestern United States. During its fiscal year ended October 31, 2014 the company processed 343.6 million chickens, or approximately 2.0 billion dressed pounds. Based on industry statistics, Asher Farms is one of the largest processors of dressed chickens in the United States based on estimated average weekly processing. Asher Farms' common stock is traded on the NASDAQ national market with an aggregate market value of $677 million on October 31, 2014. Asher Farms' chicken operations presently encompass 7 hatcheries, 6 feed mills and 8 processing plants employing 1,059 salaried and 8,646 hourly employees. The company has contracts with operators of approximately 530 broiler farms that provide the company with sufficient housing capacity for its current operations. Asher Farms also has contracts with 173 breeder farm operators and 44 pullet farm operators. INFORMATION ABOUT THE AUDIT Asher Farms is required to have an integrated audit of its consolidated financial statements and its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Your firm, Smith and Jones, PA., recently accepted Asher Farms as an audit client and as a staff auditor you have been asked to obtain some preliminary information about the poultry industry to provide a basis for understanding the client's business environment. Background information about the poultry industry from Smith and Jones' industry database is provided for your review.
[1] A useful approach for understanding a client's business environment and associated business risks is to perform a PESTLE analysis. PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors that are used to asses the client's business environment. A PESTLE analysis focuses on factors that may affect an entity's business model, but are beyond the control or influence of the client. While beyond management's direct influence, such factors may significantly impact an entity's business risk. Read the background information about the poultry industry and conduct additional research on the internet to obtain the latest news and information on the industry. Brainstorm political, economic, social, technological, legal and environmental factors that could affect Asher Farms' business risk. Unless your instructor indicates otherwise, identify at least one business risk factor for each component of the PESTLE acronym.
[2] For each of the business risk factors identified in question 1 above, indicate how each risk factor might impact the risk of material misstatements in specific financial statement accounts or disclosures.
[3] Professional auditing standards provide guidance on the auditor's consideration of an entity's business environment and associated business risks.
(a) What is the auditor's objective for understanding an entity's business environment?
(b) Why does an auditor not have responsibility to identify or assess all business risks?
(c) Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit.
(d) Provide some additional examples of business risks that might not lead to a risk of material misstatement in the financial statements.