Hayden FeinAuditingFall 2015

Rowe

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BACKGROUND

• Industry: Non-Alcoholic Beverages

• HQ: Atlanta, GA

• Founded:1886

• Listed on NYSE (KO)

• Market Cap: $179.9B (Forbes)

• World’s Largest Beverage Company

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HOW THEY MAKE MONEY• Owns, licenses and markets more than

500 brands, including sparkling beverages, diet beverages, waters, juices, teas, coffees, and energy and sports drinks

• Beverage concentrates:

• Produce concentrate which is then sold to various bottlers throughout the world who hold exclusive territory, distributors and retailers

• Finished sparkling and still beverages:

• Sell unit cases of finished beverages to distributers and retailers who then sell the products to consumers

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Coca-Cola is a manufacturer, distributer and marketer of non-alcoholic beverages

CLIENT BUSINESS RISK

• Evolving consumer preferences

• Increased competition in the marketplace

• Health concerns: obesity, poor diets & inactive lifestyles

• Water quality & quantity4

AUDITOR BUSINESS RISK

• Risk of litigation if Coca-Cola is sued for various reasons product related or otherwise

• Risk of damage to reputation if bad press is released related to Coca-Cola’s business practices

• Risk of losing existing and future clients who have a conflict of interests with Coca-Cola

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ACCEPTABLE AUDIT RISK• Acceptable audit risk is low for this engagement

• Low likelihood of financial difficulty

• High probability that the company will successfully continue in business for at least two years and be able to pay its debts as they become due

• Client is a widely-held public company, wide-spread external use is highly probable

• Management has high integrity

• Independently audited for many years

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STRATEGIC ANALYSIS• Commit to expanding its variety of choices they

provide to meet ever-changing consumer preferences

• To address growing concern about nutritional impact from product offerings

• Continue to strengthen marketing and innovation to maintain brand loyalty and market share

• Offer low or no calorie beverages and provide transparent nutrition information

• Improve water use efficiency by treating wastewater prior to discharge

• Achieve goal of replenishing the water that Coca-Cola and its bottling partners source and use in their finished products.

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PROCESS ANALYSIS

• Acquire ingredients from farmers and suppliers

• Manufacture concentrate and finished products and recognize inventory

• Ship concentrate and unit cases of finished products to bottling partners and distributors and recognize revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured.

• Retailers purchase products from bottling partners and distributors and sell products to consumers

Source: Coca-Cola Value Chain 2015

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PLANNING ANALYTICAL PROCEDURES

• Calculate price to earnings ratio

• Compare with industry to find out how much an investor of Coca-Cola common stock pays per dollar of current earnings compared to industry average

• Calculate equity to total assets ratio

• Compare with prior year to check if total assets are increasing more than owners’ equity

• Calculate number of days sales in accounts receivables ratio

• Compare with industry average to gauge how Coca-Cola’s turnover ratio is performing

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ACCEPT THE AUDIT ENGAGEMENT

• No past material misstatements

• No significant risks

• Company’s financial performance is superior to to industry

• Control risk Is low

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CYCLES • Inventory has high inherent risk with regards to valuing its account balance

• Coca-Cola’s inventory account balance depends on what value is considered for a product work-in-process stage to move into the finished good stage

• Revenue recognition has high inherent risk with regards to its completeness and cutoff

• Coca-Cola’s earnings process is dependent on how and when it recognizes revenue

• Goodwill has high inherent risk with regards to valuing its account balance

• The majority of Coca-Cola’s share value is its brand name and “secret formula”

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FRAUD RISKS• Inventory

• By overstating inventory, Coca-Cola will also be overstating gross profits, net income, current assets, retained earnings and other related financial ratios

• Revenue Recognition:

• Illegal to recognize revenue early by holding books open to the end of the amount period to accumulate more sales

• Goodwill

• Since goodwill makes up a decent amount of Coca-Cola’s assets, misstating this intangible asset value would affect stock value

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MATERIALITY FOR PLANNING PURPOSES &

TOLERABLE ERROR RATES• Materiality for planning purposes:

• Pre-Tax Income: 9,708,000,000 (Base)

• Acceptable audit risk: Low 6%

• Preliminary judgement about materiality: 582,480,000

• Performance materiality: 436,860,000

• Tolerable error rates

• Inventory, goodwill and revenue recognition accounts should all have low tolerable error rates (1% - 4%)

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BIBLIOGRAPHY• "Coca-Cola Co. (KO) | Goodwill and Intangible Assets." <i>Stock Analysis on

Net Web. 19 Nov. 2015.

• The Coca-Cola Company, Inc. (2014). Form 10K 2014. Retrieved from The Coca-Cola Company, Inc. Online Database

• The Coca-Cola Company, Inc. "Coca-Cola System and Value Chain." The Coca-Cola Company Web. 19 Nov. 2015.

• Forbes. "Coca-Cola." <i>Forbes</i>. Forbes Magazine, May 2015. Web. 19 Nov. 2015.

• Yahoo! Finance. "The Coca-Cola Company." Yahoo! Finance. Web. 19 Nov. 2015.