Case – Antelope Run Inc.

Case 18-10 Antelope Run Inc.
Antelope Run Inc. (Antelope) is a manufacturer of health and fitness products. The
following is an excerpt of the process narrative that management provided to the audit
engagement team for one of its reporting units, Fit Stride, which produces wearable
fitness trackers. Read the narrative and complete the required discussions that follow.
Annual Forecasting Process — Overview
On an annual basis, during the month of September, Antelope prepares a revenue forecast
for the fitness trackers reporting unit that includes projected revenue by product for the
next five years. The preparation of the revenue forecast is owned by the Fit Stride
director of sales and marketing (the “Director”), who relies on input from the sales
managers, each of whom oversees sales of all Fit Stride products (Fit Band, Fit Clip, and
Fit Belt) in their respective regions. The sales managers’ input includes information on
the following:
• The timing of new product launches.
• The price point for new products.
• Planned price changes in existing products.
• Customer relationship status.
• Customer demand cycles.
• Customer strategic plans, such as plans to add additional retail locations, customer
contract terms, and historical sales trends by customer.
Once the Director receives input from the sales managers, the revenue forecast is
developed on a product-by-product basis using historical sales data for existing products
or, for new product launches, historical sales data for similar products, in addition to the
input provided by the sales managers as outlined above. The historical sales data used is
disaggregated at the customer level. The Director also uses industry data to refine the
revenue forecast, including data on the manufacture and retail of wearable fitness
trackers. Example sources include analyst reports for peer companies, analyst reports for
significant customers, and Heart Healthy Quarterly (a leading industry publication on
fitness trackers).
Annual Fitness Trackers Revenue Forecast Review Meeting
The Director presents the revenue forecast to the fitness trackers business planning
committee (the “BPC”) for review and comment during its annual meeting. The BPC is
composed of the following:
• Chief executive officer — Antelope.
• Chief financial officer — Antelope.
Case 25: Antelope Run Inc. Page 2
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• Chief operating officer — Antelope.
• Chief legal office — Antelope.
• Director of financial planning and analysis (FP&A) — Antelope.
• Controller — Fit Stride.
• Director of finance — Fit Stride.
The purpose of the BPC’s review of the forecast is to ensure the forecast is an appropriate
expectation of future results for the fitness trackers reporting unit because this
information will be used in the annual goodwill impairment assessment for the reporting
unit. The meeting begins with the presentation and review of the forecast by product. The
following information is discussed:
• Forecasted vs. historical sales volumes for each fitness tracker product.
• Forecasted vs. historical sales price per unit for each fitness tracker product.
• Forecasted sales price per unit vs. comparable competitor’s sales prices per unit
for each fitness tracker product.
• Prior forecasted revenues by product vs. actual sales revenue for the prior three
years.
The meeting continues with the presentation and review of the forecast for the overall
fitness trackers reporting unit. The following information is discussed:
• Forecasted vs. historical revenues.
• Forecasted vs. historical year-over-year percentage change in revenues.
• Current-year vs. prior-year forecasted revenues.
• Forecasted year-over-year percentage change in revenues vs. forecasted yearover-year percentage change in industry and peer-company revenues.
• Prior forecasted revenues by reporting unit vs. actual sales revenue for the prior
three years.
After the information has been presented, the Director is responsible for compiling the
comments and questions posed by the BPC and making revisions to the forecast using
Hyperion Financial Management software (Hyperion). The Director then sends an e-mail
confirming the completion of the revisions, along with the revised forecast, to the
Director of FP&A for final review and approval. The Director of FP&A reviews the
amounts in the forecast in Hyperion to ensure the edits have been made appropriately and
confirms completion of the review and approval of the revenue forecast via e-mail.
Case 25: Antelope Run Inc. Page 3
Copyright 2018 Deloitte Development LLC
All Rights Reserved.
The risk of material misstatement (RoMM) has been identified as the following:
RoMM
Classification RoMM Description
Significant Management’s revenue projections and revenue growth rate
assumptions that are used in various estimates may not be based on
the best and most supportable information and contain a high
degree of estimation uncertainty. Specifically, management’s
estimates of revenue growth are not only aggressive when
compared to the historical performance of the Fit Stride products,
but also incorporate subjective assumptions associated with
revenue growth of the new Fit Belt product line.
Management has identified the following relevant control to address the RoMM:
Control
Number Control Activity Description
C-5 The BPC meets to review, challenge, and approve the revenue
forecast for the fitness trackers reporting unit for appropriateness
using historical performance, knowledge of management’s
strategic plans, industry projections, and peer-company data.
Required:
Evaluate the sufficiency of audit documentation, improvements to audit documentation,
and key considerations for each of the following components of the audit documentation
performed by the engagement team:
• Component A — Control Description
• Component B — Test of Design
• Component C — Evaluation of Design
• Component D — Test of Operating Effectiveness
1. Discussion 1 — Sufficiency of Audit Documentation
What are your observations regarding the sufficiency of the audit documentation?
2. Discussion 2 — Improvements to Audit Documentation
What specific improvements would you make to the audit documentation?
3. Discussion 3 — Key Considerations
What are some key points to remember when performing and documenting
control procedures specific to each component?