Case Study: HGA, Inc.

Case Facts

HGA, Inc. is a publicly traded retailer withheadquarters in Duluth, Minnesota. The company has more than 100 retail outletslocated throughout the continental United States. HGA sells a variety ofproducts in its stores, including food, toiletries, small electronics,cosmetics, stationery, greeting cards, and medicine. A portion of each storesretail space is dedicated to medical products such as over-the-countermedications and medical supplies. Each retail location also has a pharmacy withboth a walk-up counter and a drive-thru window.

HGA depends heavily on foreign suppliers forits inventory. In fact, the company has such good relationships with foreignsuppliers that it also acts as a wholesale distributor to other U.S.-basedbusinesses by importing foreign products and re-selling them to otherretailers. This business-to-business (BTB) function currently accounts for 35%of HGAs total sales. All BTB sales are credit sales, and potential customersmust go through a rigorous credit check to qualify for the credit account andto determine specific payment terms.

The economic conditions of recent years havecomplicated HGAs business in many ways. While the wholesale sales havesteadily increased over the past few years, business customers are havinggreater difficulty paying on time due to costs associated with new regulatoryrequirements in the industry as well as shrinking profit margins. Althoughthere are some signs of financial distress for some of HGAs corporate customers,the company continually monitors its customers credit risk and is willing todiscontinue sales to any wholesale customers who pose unacceptable levels ofrisk. In estimating allowance for doubtful accounts (AFDA), the company hastraditionally targeted approximately 5% of the ending Accounts Receivablebalance as its estimate for the ending balance in AFDA.

The sluggish economy has also had somepositive effects on HGAs performance. For example, low interest rates haveallowed the company to provide for its capital needs by borrowing at attractivefinancing rates. HGA recently took advantage of these decreasing borrowingrates to refinance a significant portion of its existing long-term debt.

Your firm has been engaged to perform theaudit of HGAs 20X8 financial statements. Assume you are a first-year auditassociate working on the HGA engagement. Your manager has asked you to performpreliminary analytical procedures as part of the planning process for thisyears audit engagement. To assist you in this assignment, your manager hasprovided you with the following data, which was compiled by a fellow staffmember on the engagement. Financial statement numbers are presented inthousands:

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1)      indicates that being able to understandanalytical procedures on an audit engagement generally requires knowledge ofthe client and the industry or industries in which the client operates. In thespace below, discuss why understanding the client and its industry is soimportant when seeking to understand analytical procedures.  (To gain abetter understanding of analytical procedures skim Topic 11 and AS 2305.)

2)      Perform preliminaryanalytical procedures by examining the ratios and account balance informationand by calculating additional ratios and growth trends using the informationprovided to you.  (If you think you do not know how to perform analyticalprocedures read Topic 11 more closely.  Preliminary analytical proceduresare risk assessment procedures.)  Use the results of performing proceduresin answering question 3.  You will need to perform calculations in additionto merely reviewing the ratios you are given.  Growth trends areparticularly important.  You may but are not required to record theresults of your computations here.

3)      In the space below,list the financial statement accounts that you believe should beinvestigated further. Justify your suggestions by indicating for each one whyyou believe the account may require additional attention using theresults of performing preliminary analytical procedures.   Also,indicate the single management assertion you are primarily concernedwith for each account. (See  fora list and description of management assertions.  If you need additionalhelp to understand assertions review the portions of Topic 5 and the recordedlecture on assertions.)  (Most of the points for this case are allocatedto this question so think carefully about the content and organization of youranswers.  Follow the directions closely.)

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