Group Project – Sonali Patel, Valerie Peters, & Elena Svintsova
Summer II 2016
Select Comfort Corporation is domestic manufacturer of mattresses, most famous for the Sleep Number. Select Comfort was formed in 1987 by Robert and JoAnn Walker in Minnesota, USA, which remains the location of company headquarters. Select Comfort has plant operations in Utah and South Carolina where it produces products to sell at its retail stores. The company operates four hundred eighty-eight retail locations in the USA, with May 2016 marking the opening of Select Comfort's five hundredth store. Select Comfort is a publicly held company currently trading on the NASDAQ (SCSS). As of January 2016, forty-nine thousand four hundred two shares of common stock were outstanding.
2. Brief Summary of Financial Position
Select Comfort Corporation is a profitable company with a favorable public opinion. Select Comfort prides itself as a sustainable company that puts the needs of its customers first. Over the last few years Select Comfort has worked to transform itself into a technologically advanced household name; it accomplished this by setting ambitious goals in four areas of its business: retail and online stores, marketing efficiency, superior products, and a firm-wide computer-based business solution. During 2015, Select Comfort opened twenty-five retail stores and in 2016 expanded to Alaska, the company's first retail location outside the continental USA. Transactions from the new stores contributed to the 5% increase in net sales from 2014; a 2015 total of $1,213,699,000. In September 2015, Select Comfort completed its purchase of SleepIQ Labs, formerly BAM Labs. BAM Labs was a Silicon Valley start-up company that invented Smart Bed technology. This acquisition by Select Comfort is an indication of its dedication to be the industry leader through product innovation. Select Comfort's drive to be the best has not gone unnoticed as the year-to-date share price has risen over 7%. And as Select Comfort works to improve the wellbeing of its customers, it also works to return cash to its shareholders through stock repurchase programs as the company has not and does not plan to distribute dividends. Analysis of Select Comfort's 2015 financial statements shows a stable company with great growth possibilities. However, due to the implementation of the firm-wide computer system in late 2015 Select Comfort experienced a sharp decline of sales in the fourth quarter contributing to overall decreases to items such as operating income ($75,096,000; -26% from 2014), net income ($50,519,000; -26% from 2014), and earnings per share ($0.99; -22% from 2014). According to management, this is not cause for concern as the computer system is at present running efficiently and last year's declines were due to unfamiliarity of the new technology; they are certain 2016 will be a profitable year.
3. Describe the nature of the attestation service you intend to provide the client.
We will be conducting an internal audit of Select Comfort Corporation. This type of attestation service calls for auditors to be both independent and objective in their assurance over all business processes used to prepare a company's financial statements. The primary beneficiary of an internal audit is the company itself, unlike investors and third-party users' who benefit from an external audit. Internal audits focus on more than verifying financial information accuracy; an internal audit allows for auditors to evaluate the effectiveness of company controls, risk management, and governance. The role of the internal auditor, beyond that of the external auditor, includes helping to prevent and detect fraud, ensuring compliance with regulations, and assessing Select Comfort's operational economy while making recommendations to increase profits and/or reduce costs. In this way, internal auditors are more like management consultants who are more concerned with the operations of Select Comfort and how efficiently it's running as a business.
The scope of our internal audit service will include the following applications:
I. Financial Audits - examine and evaluate financial information used by internal and external users with a focus on areas of concern by management:
We will inquire of management any problem areas from the previous year's external audit (10-K) and evaluate the financial information of those areas. Furthermore, we will verify and analyze the current report (8-K's dated July 6th and July 20th, 2016) filed with the SEC and used by management. Here, we will focus on the new computer system and the effect its implementation had on Select Comfort's financials and operations.
II. Operational Audits - examine and evaluate current and potential future risks, internal controls and performance quality:
We will conduct a performance-based audit by checking for risks and their potential effects on managerial-decision making processes. The use of resources will be tested for efficiency by examining the production cycle and output levels. These results will then be compared to Select Comforts qualitative objectives (as described in their mission statement signed by President and CEO, Shelly Ibach) as well as quantitative goals/targets (as announced in SEC filings and internal forecasts). A comprehensive audit of the production cycle will also be conducted to ensure that controls are in place and being followed, leading to optimal performance and results.
III. Compliance Audits - test the degree to which existing conditions adhere to professional standards implemented by governing entities, policies and processes established by the company, and laws and regulations set forth by legislature.
Compliance testing will be carried out by three different methods: (i) Professional standards such as flammability, health and safety will be tested against industry standards governed by entities like CertiPUR-US that provide quality certifications, (ii) Policies/procedures will be tested against Select Comfort's own standards developed by management and explicitly written for training and quality purposes, and (iii) laws and mattress regulations will be tested against legislature set forth by the U.S. Consumer Product Safety Commission. Contracts with suppliers and distributors will also be verified.
IV. Corporate Governance - assure that management has reliable information concerning policies, performance, risk, progress, etc.
Corporate Governance testing is done to assure that the information management is provided with to make decisions is sufficient and reliable. We do this by assuring that policies are in effect, strategic decision makers are equipped with accurate and useful information, performance is periodically and methodically recorded and communicated (analyzed), and that risk assessment is conducted. Testing for this type of audit is done almost wholly by observation and inquiry.
4. Cite the specific set of standards governing your proposed attestation service.
Internal auditing in companies is conducted in accordance with the International Professional Practices Framework (IPPF) for Internal Auditing. It was established by an international organization called the Institute of Internal Auditors (IIA). The framework includes two parts: mandatory guidance and recommended guidance. The mandatory guidance consists of Core Principles of the Professional Practice of Internal Auditing, Definition of Internal Auditing, Code of Ethics and International Standards for the professional practice of Internal Auditing. The recommended guidance consists of Implementation Guidance and Supplemental Guidance.
The IIA defines internal auditing as “an independent, objective assurance and consulting and consulting activity designed to add value and improve an organization's operations.” The main goal of internal auditing is to put in place a systematic approach to increase the effectiveness of operations, internal controls, and governance.
The Code of Ethics also helps to promote an ethical behavior for individuals as well as entities. One of the purposes of the Code is to create trust in internal auditing as a profession. The Code gives four general principles that every internal auditor is expected to follow. The principles are: Integrity - in order to make the service reliable; Objectivity – an internal auditor is expected to provide an opinion based on his or her own judgment and avoid activities that influence fairness of his or her judgment; Confidentiality – auditor should protect sensitive information unless he has an authorization from a client or legal authorities to disclose it; Competency – an auditor must have and apply sufficient knowledge, experience, skills and follow Internal Standards for Professional Practice of Internal Auditing in order to give appropriate opinion. Any breach of the Code of the Ethics is assessed using The Institute's Bylaws and Administrative Directives.
Many modifications were made to the Internal Standards for Professional Practice of Internal Auditing (Standards) from February 2012 to May 2012 leading to a revised set of standards which became effective January 1, 2013. Currently, the standards are undergoing another review with amended version is expected to be released on January 1, 2017. The 2013 Standards are divided into two categories: Attribute Standards and Performance Standards. Attribute standards are subdivided into four categories:
1. Purpose, Authority, Responsibility. This three attributes are identified in the formal document called the internal audit charter. This document is approved by board of directors. The charter identifies the internal auditor function, activities and describes the nature of the reporting.
2. Independence and Objectivity. Similar to an external auditor, an internal auditor must be independent. However, since the internal auditor is a part of the company, independence can be achieved through dual-reporting relationship. The auditor must report to the managerial level that will allow to maintain independence. Objectivity is basically fair judgment that allowed to “avoid conflict of interest.”
3. Proficiency and Due Professional Care. Internal auditor must have sufficient knowledge and experience, including appropriate level of certification in order to fulfill work obligations.
4. Quality Assurance and Improvement Program. Internal auditor is obligated to develop and maintain an effective quality assurance and improvement program that focuses on both external and internal evaluations.
The second part of the Standards is Performance standards. They are divided into seven sub-categories:
1. Managing the Internal Audit Activity. One of the distinct functions of the internal audit is to add value. Auditor must perform engagement activities in accordance with the Standard and the Code of Ethics and ensure that this work makes positive contribution to the organization.
2. Nature of Work. The internal audit must give recommendation how to improve governance increase efficiency through continuous improvement, mitigate and decrease existing risks.
3. Engagement planning. An important part of internal auditing work is developing and engagement plan after considering business and time constraints.
4. Performing the Engagement. Internal auditor is expected to execute a written plan and document findings of the engagement.
5. Communicating Results. The auditor is required to provide his objective free from error opinion based on discovered facts and give recommendations and guidelines how to solve existing issues.
6. Monitoring Progress. It is a distinguished aspect of internal auditor's work. An auditor must maintain well-functioning monitoring activities taken by management that were suggested in the report.
7. Communicating the Acceptance Risk. The Chief Internal Auditor is not responsible to resolve the risk. S/He agrees that management accepts the level of risk; even it can be too high in some cases.
5. Cite any training, certification, or expertise that your team would need to provide the service.
In order to provide quality internal audit service, an auditor should be certified by the IIA as a Certified Public Accountant (CIA). Similar to a Certified Public Accounting designation (CPA), a Certified Internal Auditor designation requires an applicant to go through a series of steps to be recognized by the Institute of Internal Auditors. It includes education, examination including Code of Ethics, and work experience.
Internal auditors working for companies such as Select Comfort should have extensive knowledge of the manufacturing industry in order to provide valuable suggestions to improve the operations of company. The same is true if the internal auditor is providing quality control audits. However, it is crucial that the internal audit team remain independent and objective in their work. To maximize the quality of the audit while maintaining independence, we will employ a combination of Select Comfort's internal audit team and our independent audit team. This would allow for a better understanding of the industry, and objective, quality audit work.
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