ACCOUNTING theory

CHAP 4 &CHAP 5

1. According to Smieliauskas and Bewley (2013), the text is divided in 4 Parts:

Introduction, Management Responsibility, Auditor Responsibility, and in conclusion an

auditor’s opinion.

To the Board of Directors and Stockholders of Lululemon Athletica Inc.

We have audited the accompanying financial statements of Lululemon Athletica Inc. and its
subsidiaries, which included the consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, stockholders ‘equity, and Cash flows as at
February 3, 2013 and January 29, 2012, the schedule of financial statements, and the maintenance
of the company’s internal control over financial reporting as of February 3, 2013.

Management’s Responsibility for the Financial Statements

The Company’s Management is responsible for the preparation and fair presentation of these
financial statements in accordance with International Financial Reporting Standards, and the
financial statement schedule, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s annual report on Internal Control over Financial Reporting under Item 9A.

Auditor’s responsibility

Our responsibility is to express opinions on the financial statements, on the financial schedule,
and on the company’s internal control over financial reporting based on our audits. We conducted
our audits in accordance with Canadian Generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement
and whether effective internal control over financial reporting was maintained in all material
respects.

An audit of these financial statement included examining, on a test basis, accounting principles
used and significant estimates made by management, and evaluating the overall financial
statement. Our audit also involved obtaining an understanding of internal control over financial
reporting, assessing risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Finally, as necessary in the
circumstances, our audit did include performing other procedures.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion

Opinion

In our opinion, the consolidated balance sheets and the related consolidated statements of
operations and comprehensive income, stockholders’ Equity and Cash Flows present fairly, in all
material respects, the financial position of Lululemon Athletica Inc. and its Subsidiaries at
February 3, 2013 and January 29, 2012 and the results of their operations and their Cash flows for
the three years ended February 3, 2013, January 29,2012 and January 30,2011 in conformity with
International Financial Reporting Standards. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of February 3, 2013, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Tread way Commission (COSO). A company’s internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with Canadian
generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance Canadian with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

2. If auditors do not obtain enough evidences on the issue, they must choose between a qualified

opinion and an adverse opinion, and the choice will depend on the materiality (significance) and

pervasiveness. This is called accounting deficiency reservation and it is a reservation based on

GAAP departure. However, if their work has clearly been limited by Lululemon Management,

hindering auditors to get the needed evidence on the account balance, the auditors will choose to

give a qualified opinion or a disclaimer of opinion. That is audit deficiency reservation that

results from a scope limitation (Smieliauskas and Bewley, 2013, p. 107).

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3. The decision of an audit acceptance and continuance generally involves an application of a list of

acceptance/continuance decision procedures provided by Smieliauskas and Bewley (2013, p.

130):

Obtaining and reviewing financial information about the prospective auditee

organization to determine purpose, main users, and basis of accounting.

Evaluating the public accounting firm and individual auditor’s independence from

the prospect

Considering whether the public accounting firm has competency, resources, any

special skills required.

Obtaining information from management as to whether the prospect’s management

accepts responsibility for the financial statement preparation and implementing

adequate controls to reduce risk of errors and fraud

Considering whether the engagement would require special attention or involve

unusual risks.

Searching for news reports and when possible, asking business associates about the

organization.

As a new auditor, It would be a good thing to get feedback from previous auditors.

To know the reason why they are no longer Lululemon auditors would help in the

decision, and know whatever issue encountered by these while performing their

audit.

To measure how much Lululemon is risky in auditing its financial statements, an auditor would take into

account the following factors:

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It the company is widely distributed: Lululemon is a public company listed on the

NYSE: therefore risky

Consider how strong is its financial condition

How trustworthy is Lululemon Management?

The complexity of the financial reporting of Lululemon

How knoweldegeable are the people likely to be using the financial statements?

4. An estimate of materiality can be based on for example 5-10% pre-tax normal income, 0.5-1%

net asset value.

3 Quarters
03-Feb-13 29-Jan-12
2014
Assets 1,175 1,051 734
Liabilities 131 164 128
Net Assets
1,044 887 606
value 5.22-10.44 4.435-8.87 3.03-6.06
Revenue 1,070 up 21% 1,370 1,001
Gross Profit 561 up 15% 763 569
12.05-24.1
Pre-tax income 241 up 6% 381 289 14.45-28.9
up to 6% 19.05-38.1
5-10% or pre tax Inc.

Other Two possible ratios that could be calculated for analysis are:

Gross margin percent: to suggest on inefficiency of performance of operation, etc.

Current ratio or quick ratio: to indicate liquidity problem, poor financial condition, risk of lullulemon

business failure.

5. Here are some financial statement assertion for the inventory account at Lululemon:

 Have a physical count to know if the inventory really recorded, are on hand

 Check if the entire inventory that Lululemon owns, has been recorded.

 Check if the dollar amount allocated to the finished goods is correctly calculated

according to IFRS

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 Find out If Lululemon has a proper title to the inventory account: are inventory recorded

after being purchased or upon delivery?

 And finally review if the account is properly presented in the financial statement with all

the notes required to it.

Reference
Smieliauskas, W., & Bewley, K. (2013). Auditing: An International approach (6th ed.). Toronto: McGrwa-
Hill Ryerson.

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