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left250002514600STARBUCKS CORPORATION900007300STARBUCKS CORPORATIONrighttopAmanda Grieco, Tevin Chapman, James McCartyGroup 54/25/201440000100000Amanda Grieco, Tevin Chapman, James McCartyGroup 54/25/2014252580831624080039836037821709 ACC 455 - Auditing020000 ACC 455 - AuditingTABLE OF CONTENTSAnnual Report Industry.. 1 Primary Products .1 Raw Materials. 1 Company Statistics .2 Location. 2 Associations. 2 Annual Report Image and Contents. 310-K Report 3Starbucks Vs. Industry Key Economic Factors 4 Life Cycle 4 Factors of Success 4 Stance of Success Factors 4 Key Business Risks 5 Notable Accounting Considerations 6 Legal/Regulatory Matters 7 Social Matters 7 Corporate Governance 9 Sarbanes-Oxley Compliance 9Financial Strength Analysis Financial Strength 10 Changes in Near Future 10 Sources of Capital and Valuation 11 Capital Market Response 12 Industry Comparison 12Audit Planning Major Transactions and Cycles 13 High-Risk Areas 14 Low-Risk Areas 14 Fraudulent Opportunities 15 Assessed Control Risk Reduction 15 Auditor’s Reporting 15Works Cited 16ANNUAL REPORT What is Starbucks’ industry?Starbucks’ industry is specialty coffee. According to Starbucks Corporation, 66 billion cups of coffee are drunk every year in the U.S., and a full three quarters of those cups of coffee are enjoyed at home (n.p.). Starbucks has no clear competition; however the closest competitors include other specialty coffee shops, doughnut shops, and restaurants. Starbucks holds a dominant position in the specialty coffeehouse market and has no single clear rival in the sector. In the specialty coffee market, the closest is Caribou Coffee, which has 415 stores in the United States, which is less than 5% of Starbucks' 11,000 and counting. Its most intense specialty coffeehouse competition is dispersed among the thousands of independent or small-chain coffee shops around the nation and the world (Company Profile 1).What are Starbucks’ primary products?Starbucks offers a range of exceptional products that customers enjoy in our stores, at home, and on the go.Coffee: More than 30 blends and single-origin premium coffees.Handcrafted Beverages: Fresh-brewed coffee, hot and iced espresso beverages, Frappuccino? coffee and non-coffee blended beverages, Starbucks Refreshers, smoothies and teas.Merchandise: Coffee and tea brewing equipment, Verismo System? by Starbucks?, mugs and accessories, packaged goods, music, books and gifts.Fresh Food: Baked pastries, sandwiches, salads, salad and grain bowls, oatmeal, yogurt parfaits and fruit cups.Consumer ProductsCoffee and Tea: Whole bean and ground coffee (Starbucks and Seattle’s Best Coffee brands), Starbucks VIA?Ready Brew, Starbucks? K-Cup? portion packs, Starbucks? and Teavanna? Verismo? pods, Tazo? tea filterbags, and tea latte concentrates.Ready-to-Drink (RTD):Starbucks? bottled Frappuccino? coffee drinks, Starbucks Discoveries? chilled cup coffees, Starbucks Discoveries? Iced Café Favorites?, Starbucks Iced Coffee, Starbucks Doubleshot? espresso drinks, Starbucks Doubleshot? Energy+Coffee drinks; Starbucks Refreshers? beverages, Evolution Fresh bottled juices, Tazo? bottled iced and juiced teas (Company Profile 2).What raw materials does Starbucks use?Coffee beans, paper cups/lids, plastic cups/lids, syrups, dairy, fruit purees, juice concentrates, ingredients for food items, and teas are the raw materials used by Starbucks. The coffee beans are harvested, roasted, shipped, and then they undergo a wide variety of business techniques to land in consumer's hands. Most are ground up and processed into drinks right there. Other types of beans are sold in bulk in bags for home brewing. Starbucks thrives on this raw material more than any other. Their product line constitutes their finished goods, and everything that goes into brewing a good cup of coffee requires regular maintenance and upkeep. The machines have to be kept in good condition to grind, blend, and warm up the drinks. Starbucks is a major business, and it has all the components. Based on its massive success as a chain, it's not much of a secret to say that they've mastered many of these elements, from procuring raw materials on down. (Responsibility n.p.)How large is the company? (Statistics retrieved from Annual Report)Sales: Total net revenues increased 12% to $14.9 billion in fiscal 2013 compared to $13.3 billion in fiscal 2012. Of the total net revenues, $11,793.2 billion was generated from company operated stores, $1,360.5 B was from licensed stores, and $1,738.5B was from other segments of operations.Assets: Total assets for fiscal 2013 were $11,516.7 million, which was an increase of 40.2% from fiscal 2012 ($8219.2M). This is due in part to an increase in deferred income taxes from the loss of litigation with Kraft Foods. Employees: 182,000 worldwide: 137,000 in the United States and 45,000 outside of the U.S.Where is Starbucks located?Starbucks Corporation is an American global coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world with 20,891 stores in 64 countries, including: 13,279 in the United States, 1,324 in Canada, 989 in Japan, 851 in China, and 806 in the United Kingdom (Company Profile n.p.). Of those stores, they have stand-alone stores and kiosks within retailers, i.e. Target, Bass Pro Shops, and Kroger grocery stores. What other people/companies are closely associated with Starbucks? Seattle's Best Coffee, a wholly owned subsidiary of Starbucks, is a specialty coffee retailer and wholesaler based in Seattle, Washington. Seattle's Best Coffee has retail stores and grocery sub-stores in 20 states and provinces and the District of Columbia. Sub-stores can also be found within many other businesses and college campuses, including Subway restaurants. Seattle's Best Coffee is generally cheaper than that of its parent, and is marketed as more of a working class coffee compared to the more upmarket Starbucks. Seattle's Best Coffee began as a combination ice cream and coffee shop called the Wet Whisker on Whidbey Island, northwest of Seattle, Washington. In addition to its subsidiary, Starbucks is, “focused on galvanizing a passionate network of our diverse partners, customers, nonprofit organizations, businesses and civic leaders for innovative, positive change (Responsibility n.p.).” Starbucks’ network includes: Abyssinian Development Corporation (ADC), American Red Cross, AAMA (The Association for the Advancement of Mexican Americans), Association of Postconsumer Plastic Recyclers, Business for Social Responsibility (BSR), Calvert Foundation, Catalyst, Business for Innovative Climate and Energy Policy (BICEP), Conservation International, , Foodservice Packaging Institute, Inc. (FPI), Global Green USA, Global Social Compliance Programme, Incofin Investment Management, Fairtrade International and Grameen Foundation, International Youth Foundation (IYF), Los Angeles Urban League, Mercy Corps, Multicultural Foodservice & Hospitality Alliance, NAACP, National Urban League (NUL), National Urban League (NUL), Points of Light, Product(RED)?, Root Capital, Save The Children, Sustainable Food Lab, Sustainable Packaging Coalition, U.K. Youth, US Business Leadership Network (USBLN?), United States Green Building Council (USGBC), Washington State Recycling Association (WSRA), Women in Foodservice Forum, and the World Cocoa Foundation (Responsibility n.p.).Look at the annual report: What image does it intend to convey? The annual report conveys an image of sustainable growth by a company that has core values to maintain its image and control of its products and distribution. It has a focus of supplying the highest quality of goods and services to its customers and maintaining a positive relationship with its shareholders. When you read the annual report, the tone is positive even though they had a downfall in their financial statements/condition due to litigation loss with Kraft Foods. What are the segments and functional contents of the report?The annual report opens with a executive summary from Howard Schultz, President and CEO of Starbucks, that is directed to shareholders. In part one, the basic company information, risk factors, unresolved issues, and legal issues are displayed to give an overview of the company as a whole. In part two, consolidated financial statements, segments of the company’s performance, equity, accounting issues, and controls and procedures are displayed to supply the numerical data and internal processes to its shareholders. In part three, top company management and governance, executive compensation, shareholder matters, company relationships and related transactions, and accountant information is displayed to show the hierarchy and relationships therein. Part four contain exhibits and financial statement schedules for reference. 10-K ReportHow does the 10-K differ from the annual report?The annual report includes an introduction overview of the major highlights of the company, but otherwise is identical to the 10-k report.The Coffee IndustryWhat are the key economic factors about the industry?The key economic factors for the coffee industry would be growth rates, interest rates, levels of employment, and price stability (inflation and deflation). The growth rate is measured by the change in the amount of goods and services produced by a nation’s economy. The Industry as a whole showed to have a soft growth for 2013. The top 3 competitors of the industry: Starbucks showed a 7% growth in sales, Nestle had a 2.7% increase in sales, and Dunkin Brands had a 3.4% growth in sales.Where is Starbucks in terms of its life cycle? Starbucks is in the growth stage of its life cycle. Starbucks states their standard as: “The Starbucks Experience is built upon superior customer service, as well as clean and well-maintained company-operated stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty.” Starbucks wants to continue to grow by increasing their global business by increasing their market share in a disciplined manner by selecting opening additional stores in new and existing markets, as well as growing sales in existing stores, to support their long-standing strategic objective to maintain Starbucks standing as one of the most recognized and respected brands in the world. Store growth in precise obtainable markets will vary due to countless factors, including the maturity of the market.What are the five or six most important factors for success for Starbucks?1. Quality of products-Increasing level of competition in the market is fuelling the level of customer expectations regarding the quality in general, and freshness in particular.2. Customer services-Excellent customer services are being adopted as an important source of competitive edge by increasing numbers of coffee shops that Starbucks have.3. Shop Design-Coffee shops are being positioned as a ‘third place’, where people can spend most of their time apart from workplace and home. Accordingly, relevant atmosphere needs to be developed with the interior, music, and design. 4. Social Responsibility-The impact of corporate social responsibility on profitability has increased significantly in the past several years. Accordingly, the level of engagement in fair trade, recycling policies, carbon emission policies, and employee treatment can be specified as important success factors for branded coffee shops like Starbucks. 5. Customer loyalty rewards- consumer behavior is greatly impacted by the level of attractiveness of loyalty programs that offer discounts and other advantages to loyal customers.How does Starbucks stand with respect to these factors? Starbucks is in good standing as far as their success factors. As a company, they have exceeded all their expectations in all aspects. In 2013, they reached record revenues of $14.9 billion, which was a 12 percent increase from the previous year. Also, they had a 7 percent rise in global comparable shares with an opening of 1,701net new stores around the globe. Starbucks had a non-GAAP operating income of 2.5 billion, a 23 percent increase, for the 2013 fiscal year. They also had non- GAAP operating margin of 16.5 percent. With this record growth, they were able to have non-GAAP $2.26 earnings per share which was a 26 percent increase from 2012. With those record numbers, Starbucks was able to return $1.2 billion to their shareholders.*Non-GAAP referring to litigation results on financial statements per GAAP rules and regulations on reporting.Describe four or five key business risks related to the Starbucks’ business and industry.Starbucks believes that if any of these risks were to actually occur, their business, financial condition, results of operation, and the trading price of their common stock could be materially affected. Economic condition in the U.S. and certain international markets could be a risk factor. Starbucks is a retailer that is dependent on consumer spending. Their results of operations are sensitive to changes in macroeconomic conditions. Starbucks believes if their customers have less money for purchases, they may stop or reduce their purchases of products. They also believe that it may be a possibility that their customers may trade down to competitor’s lower priced products due to job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit and lower home prices. Starbucks believes that if negative economic condition persist for a long time or even worsen, that consumers may long-lasting changes to their purchasing behavior, including less frequent purchases on a more permanent basis. Starbucks recognizes the risk of not successfully implementing important strategic initiatives or effectively managing growth. Starbucks makes no assurance that they will be able to implement strategic initiatives in accordance to their expectations. Their strategic initiatives are designed to create growth, improve their results of operation and drive long-term shareholder value. Their strategic initiatives would include: Successfully leveraging Starbucks brand portfolio outside the company-operated store base, including our increased focus on international licensed stores.Focusing on relevant product innovation and profitable new growth platforms, including retail tea, and achieving customer acceptance of these new products and platforms while maintaining demand for our current offerings.Continuing to accelerate the growth of our Channel Development business;Balancing disciplined global store growth and existing store renovation while meeting target store-level unit economics in a given market.Timely completion of certain supply chain capacity expansion initiatives, including increased roasting capacity and construction of a new soluble products plant.Executing a multi-channel advertising and marketing campaign to effectively communicate our message directly to Starbucks consumers and employees.Strategic acquisitions, divestitures or joint ventures. Starbucks believes increases in the cost of high-quality Arabica coffee beans or other commodities or decreases in the availability of high-quality Arabica coffee beans is a business risk as well. Arabica coffee trade on a negotiated basis. The price depends on the supply and demand at the time of purchase and the price can vary significantly. Increases in the coffee price do increase the price of high-quality Arabica coffee and also impact Starbuck’s ability to enter into fixed-price purchase commitments. Interruption of supply chain could affect their ability to produce or deliver their products which is a business risk. Any key material interruption in their supply chain such as roasted coffee supply due to the casualty loss of any of their roasting plants, interruptions in service by their third party logistic service providers or common carriers that ship goods with their distributions channels, trade restrictions, such as increased tariffs or quotas, embargoes or customs restrictions, or natural disasters that cause a material disruption in their supply chain could have a negative impact on the company. One final business risk would be Starbucks failing to meet market expectation for their financial performance which would affect the market price and volatility of their stock. Moving forward, failing for the company to meet market expectations, particularly with respect to operating margins, earnings per share, comparable store sales, operating cash flows, and net revenues, will likely result in a decline and/or increased volatility in the market price of their stock. Starbucks recognizes that they operate in a very competitive and changing industry. New risk factors emerge for them and it is not impossible for Starbucks to predict the impact these factors will have on their company.What notable accounting considerations are there for companies in the coffee industry?Property, Plant, and Equipment and Definite-lived Assets- When there are issues with carrying values of these assets that may not be recoverable, there should be evaluations for impairments. “Key assumptions used in this calculation include revenue growth, operating expenses and a discount rate that we believe a buyer would assume when determining a purchase price for a store (A.R 40).”Goodwill and Indefinite-lived Intangible Assets – Evaluation for impairments for goodwill should be done annually with key assumptions including “revenue growth, operating expenses, and a discount rate that we believe a buyer would assume when determining a purchase price for the reporting unit.” Indefinite-lived intangible assets should be evaluated for impairments annually or if an event occurs that suggests impairment may exist. “Key assumptions used in this calculation include revenue growth, the royalty rate that could hypothetically by charged by a licensor of the asset to an unrelated licensee, and a discount rate that we believe reflects the level of risk associated with receiving the future cash flows attributed to the asset (A.R 40).”Income Taxes – Deferred tax assets and liabilities are recognized “based on the differences between the financial statement carrying amounts and the respective tax basis of the assets and liabilities (A.R. 41).” Routine audits of income tax returns by domestic and foreign tax authorities are done.Litigation Accruals – “Legal and other contingency reserves and related disclosures are based on our assessment of the likelihood of a potential loss and our ability to estimate the loss or range of loss, which includes consultation with legal counsel and advisors (A.R. 41).” Assessments are reviewed each period and revised based on facts, circumstances, and historical experience. What legal or regulatory matters are of concern?In the first fiscal quarter of 2011, Starbucks notified Kraft Foods Global, Inc. that they were discontinuing their distribution agreement with Kraft on March 1, 2011 due to material breaches by Kraft of its obligations under the Supply and License Agreement between the company and Kraft. The distribution arrangements between the two companies began March 29, 2004. With their arrangement with Kraft, they sold a selection of Starbucks and Seattle’s Best Coffee branded packaged coffee in grocery and warehouse club stores throughout the US, and to grocery stores in Canada, The United Kingdom and other European countries. Kraft managed the distribution, marketing, advertising and promotion of these products. Kraft denied it had materially breached the contract. On November 29, 2010, Starbucks received a notice of arbitration from Kraft putting the commercial dispute between the parties into binding arbitration pursuant to them of the Agreement. In addition to denying it materially breached the agreement, Kraft further alleged that if Starbucks wished to terminate the agreement it must compensate Kraft as provided in the Agreement in an amount equal to the fair value of the Agreement with an additional payment up to 35%. On December 6, 2010, Kraft started a federal court action against Starbucks; it was titled Kraft Foods Global, Inc. v Starbucks Corporation. On January 28, 2011, the New York District Court denied Kraft’s request for injunctive relief. Kraft appealed but lost the appeal and Starbucks has been in full control of their packaged coffee business since March 1, 2011. On April 2, 2012, Starbucks and Kraft exchanged expert reports regarding alleged damages on their affirmative claims. Starbucks claimed damages of up to 62.9 million from losses and attorney fees. While Kraft opined the rest of the agreement to be worth $1.9 billion and after applying 35% premium and 9% interest, they came up with damages of $2.9 billion plus attorney fees. Starbucks offered $750 million to Kraft to avoid litigation and to ensure a smooth transition of the business. Kraft rejected the offer and did not provide a counter-offer. Arbitration ordered Starbucks to pay Kraft 2,784.1 in damages which also included attorney fees. Starbucks recorded that litigation charge in their fiscal 2013 operating results. What social matters are of concern?The social matters that are of concern for Starbucks are ways that they can positively impact their communities: “Our communities are not just where we have stores. They are every place our business touches, from the backyards of our customers, to the farms where our coffee is grown. We have a responsibility to make our communities stronger – using the scale of our business for positive change.” Starbucks have six sections of ways this wish to impact the community; community service, community stores, youth leadership, farming communities, Diversity and Inclusion and Starbucks Foundation. Community Service- Starbucks have a Global month of Service where they lead community service projects focused on individual needs of the neighborhoods where they live and work. Starbucks have a goal in which they want to mobilize their employees and customers to contribute 1 million hours of community service by 2015. As far as progress towards that goal, they contributed over 17,600 service hours more in 2013 than munity Stores- Each one of Starbucks stores works directly with a nonprofit organization that offers services intended to accommodate the need of that individual community. This model creates a candid stream of resources for the nonprofit organization, raises awareness of their work, and creates a space for community dialog and engagement.Youth Leadership- “The Starbucks Foundation believes in developing young people to become extraordinary leaders, by investing in the leadership skills required for the changing global economy.” Starbucks want to help organizations that equip young people ages 15 to 24 years old in the areas of business savvy, social conscious and collaborative communication. ?In 2013 Starbucks awarded nearly 100 Starbucks Youth Leadership?Grants to local organizations in 16 countries activating almost 50,000 young people.Farming Communities- Starbucks capitalizes in platforms designed to support economic and social development?in local communities, while also caring for the environment. To extend the influence and power of the programs, Starbucks cooperate with nongovernmental administrations that have familiarity and skill in working with farming communities. Starbucks also support communities through farmer loans. They hope these investments will grow their farmer support centers and to improve their Ethical Sourcing Programs, such as C.A.F.E. Practices. With these Strategic Plans Starbucks is cultivating the flexibility of our?supply chain and, guaranteeing the long-term supply of high-quality coffee and other unindustrialized goods, as well as building stronger, durable farming communities. In all, Starbucks has invested more than $70 million in collaborative farmer programs and activities – including C.A.F.E. practices, farmer support centers, farmer loans and forest carbon projects.?Diversity and Inclusion-Diversity is the existence of many unique individuals in the workplace, marketplace and community while inclusion is having a work environment where everyone has an opportunity to fully participate in creating business success and where each person is valued for his or her distinctive skills, experiences and perspectives. Starbucks strives to create a culture that values and respect diversity and inclusion. They expect everyone within the company to exercise diversity and inclusion, from their partners in the field to their senior leadership teams. To help make their goals become reality, Starbucks has integrated diversity and inclusion into the core of their leadership capabilities. They expect that all leaders within Starbucks to practice manners that demonstrate inclusion. They will reach out to influence various points of view, talents and proficiencies. Starbucks will work and think across teams, functions and businesses; across markets, channels and organizations; across cultures and communities; across physical and digital spaces.Starbucks Foundation- “The Starbucks Foundation was created as part of our commitment to strengthen communities.” The Starbucks Foundation contributed $8.7 million in 2013, making 144 grants to nonprofit organizations. Grants included $3.7 million for Starbucks Youth Leadership Grants and $347,000 in origin social development grants. Also Starbucks Corporation gave $15.6 million in cash, including $11.8 million to the Starbucks Foundation. (Starbucks Foundation)How does Starbucks do in terms of corporate governance?Starbucks does well in terms of corporate governance. It was recently revised on November 5, 2013. The corporate governance states how most of the responsibility with Starbucks Corporation begins with the Board of Directors. They are responsible for making sure the company meets their goals and objectives and also the long term interest of their shareholders. “The Board recognizes its responsibility to engage, and provide for the continuity of, executive management that possesses the character, skills and experience required to attain the company’s goals and its responsibility to select nominees for the Board of Directors who possess appropriate qualifications and reflect a reasonable diversity of backgrounds and perspectives.” With the board recognizing that it is very important for them to select great management, they are setting the company up to have a good “Tone at the Top”, which is the beginning to have successful internal controls. The board is made up of 12 members. The board shall appoint new member(s) if the board fall below 9 members or if they determine the number of members should be increased. They are required to have a minimum of 5 meetings each fiscal year. (Starbucks Corporate Governance)How does Starbucks do in compliance with the Sarbanes-Oxley Act of 2002?Starbucks is in good standing with compliance of the Sarbanes-Oxley Act. Starbucks audit was conducted by Deloitte & Touche, LLP. When it came to the audit report of Starbucks financial statements, they received and unqualified opinion. “In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Starbucks Corporation and subsidiaries as of September 29, 2013 and September 30, 2012, and the results of their operations and their cash flows for each of the three years in the period ended September 29, 2013, in conformity with accounting principles generally accepted in the United States of America.” On the evaluation of internal control, management concluded that the internal control over financial reporting was effective as of September 29, 2013 based off of the Committee of Sponsoring Organizations of the Treadway Commission. On the Separate Report on Internal Control over Financial Reporting, Deloitte & Touche, LLP expressed an opinion, “the Company maintained, in all material respects, effective internal control over financial reporting as of September 29, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission”.Financial StrengthIs Starbucks a financially strong company?Yes. In their fiscal 2013 annual report, Starbucks noted to their shareholders that they “delivered record performance and exceed[ed] expectations on almost all fronts.” According to the figures, Starbucks has record revenues of $14.9 billion in 2013, which is a 12% increase from the previous year. The figure includes a 7% increase in global store sales. In addition to record revenue growth, Starbucks also had record earnings per share of $2.26, which is 26% higher than fiscal 2012 (Annual Report). Starbucks has been maintaining record growth since fiscal 2009. Below is a graph noting the continuous growth of the previous fiscal years and the estimate growth up to fiscal 2018.How is the financial strength likely to change in the next year or so?As noted in the graph above, Starbucks is estimating continued growth in sales, operating profit, net income, net margin, and operating margin. According to 4-Traders, the financial ratios have stated an estimated company value of $57,533 M and $57,644 M in fiscals 2014 and 2015, respectively (n.p.). In the near future, Starbucks plans to open 1,500 net new stores that also follow their financial, innovative, and responsible growth ethics. They’re continuing to expand their global efforts along with their Tevana Tea? Fine Teas + Tea Bars, La Boulange? bakery items, and Evolution Fresh? juice lines (A.R. ii.).What are the sources and value of Starbucks’ capital?According to Starbucks’ borrowing capacity, their $500 million unsecured, revolving credit facility is set to mature in November of 2014 and was replaced with a new $750 million unsecured, revolving credit facility through various banks, called the “2013 credit facility.” Of the amount, $150 million may be used for issuances of letters of credit. The 2013 credit facility has the option to be doubled and is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases. Starbucks’ board of directors has also approved a maximum of $1 billion of unsecured commercial paper notes which may be used for same purposes as the 2013 credit facility. As of fiscal 2013, there were no borrowings under the credit facility or commercial paper program and $21 million letters of credit were outstanding under the credit facility. In September 2013, Starbucks issued $750 million of 10-year 6.25% Senior Notes due in October 2023 (A.R. 35-36).According to the annual report, “As of November 8, 2013, [Starbucks] had approximately 18,470 shareholders of record. This does not include persons whose stock is in nominee or “street name” accounts through brokers (16).” The maximum number of shares that may be repurchased were 26,359,511 shares. As of March 19, 2014, the market rate went up 2.14% at $76.20. Earnings per share and dividends for fiscal 2013 through estimates up to fiscal 2016 are as follows:How has the capital market responded to Starbucks?Starbucks’ continued growth and efforts toward its communities and employees has led to a positive response year after year. According to the investor relations information on their website, financial analysts state a “buy” status and a “B” rating on their stocks. With the rising prices of coffee, the market is concerned about consumers having a negative reaction to a rising cost for Starbucks’ products, therefore affecting their EPS and investing numbers. According to an interview with Howard Schultz, CEO of Starbucks, he stated that, “I think this is a time in America where raising prices is not the right strategy. The truth of the matter is that dairy is probably a bigger issue for us going forward than coffee, but we will be able to maintain our guidance, our EPS and absolutely manage through and negotiate through any rise in coffee costs. So I think the market should realize that is a nonevent (Meola n.p.).” This outlook, along with the comparisons in the next section, shows how Starbucks has a continued positive response.How does Starbucks compare with the rest of the industry? According to The Street Ratings Team, the growth of Starbucks’ revenues is 5.6% higher than the industry (n.p.). Yahoo! Finance’s Direct Competitor Comparison (as shown below) is showing revenues of $15.34 billion for Starbucks and only $2.69 million for the industry. The debt-to-equity ratio is below the industry standard at 0.42, which is showing effective debt management. Due to investors recognizing positive growth of Starbucks, the company’s shares have risen by 27.04%. This rise has exceeded the S&P 500 Index, and although the shares are expensive compared to the industry, investors are stating that they are justified by the strengths of the company. The graph below shows other ways the company also compares to its direct competitors:Direct Competitor Comparison?SBUXDNKNMCDNSRGYIndustryMarket Cap:57.99B5.56B94.50B234.02B16.72MEmployees:182,0001,144440,000333,0008.00Qtrly Rev Growth (yoy):0.120.130.020.000.00Revenue (ttm): 15.34B713.84M28.11B98.97B2.69MGross Margin (ttm):0.570.780.390.480.02EBITDA (ttm):3.05B330.63M10.10B18.55B-4.32MOperating Margin (ttm): 0.150.390.300.16-0.78Net Income (ttm):116.80M146.90M5.59B10.73BN/AEPS (ttm):0.151.365.553.35-0.17P/E (ttm):498.1238.4317.2021.88N/APEG (5 yr expected):1.511.822.135.06N/AP/S (ttm):3.797.803.402.356.21Audit PlanningWhat are the major types of transactions and transaction cycles of Starbucks?(1) SALES AND COLLECTION CYCLE Sales –process customer orders, grant credit, ship goods, record sales and bill customers/suppliers.Cash Receipts –to process and record cash receipts.Sales Returns and Allowances –: to process and record sales returns and allowances.Write-off of Uncollectible Accounts –to write off uncollectible accounts receivables.Bad Debt Expense –to provide for bad debts.(2) ACQUISITION AND PAYMENT CYCLEAcquisitions – to process purchase orders, receive goods and services, and recognize liabilities.Cash Disbursements – to process and record cash disbursements.Purchase Returns, Allowances, and Discounts – to process and record relating transactions.(3) PAYROLL AND PERSONNEL CYCLEPayroll – functions include: human resources and employment, timekeeping and payroll preparation, payment of payroll, and preparation of payroll tax returns and payment of taxes.(4) INVENTORY AND WAREHOUSING CYCLEProcess Purchase Orders – requisitions and ordersReceive Raw Materials – reporting and invoicingStore Raw Materials – perpetual inventory filingProcessing Goods - raw materials requisitions and cost accounting recordsStoring Finished Goods - finished goods perpetual inventory and accounting recordsShipping Finished Goods – shipping documents, finished goods perpetual inventory, and accounting records.(5) CAPITAL ACQUISITION AND REPAYMENT CYCLENotes Payable and Related Interest Expense – principal and interest payments of capitalCommons Stock, Paid-In Capital In Excess of Par, Dividends, Retained Earnings - Owner’s equity transactionsWhat are the high-risk areas? (Highlighted in RED.)What are the low-risk areas? (Highlighted in YELLOW)*See Ratio Comparison Chart belowHigh-risk factors (ending account balances): Cash: + 117% which affected the Cash and Current Ratios.Liabilities: Accrued litigation of $2784.1 million, Long-term Debt + 136%, Total Liabilities increase by 127%, which affected Debt to Equity Ratio.Operating income fluctuated from a $1997.4 million gain to a $325.4 million loss, due to litigation charge, which affected Times Interest Earned Ratio and Profit Margin Ratio.EPS decreased from $1.83 to $.01 million, due to a decrease in net earnings.Income before taxes decrease from $2059.1 million to a loss of $229.9 million.After evaluating the financial statements, it is shown that the primary reasoning behind the significant differences between ratios from the current and previous fiscal years are due to litigation loss with Kraft Foods. The ratios with significant differences and negative values are due to the values used to calculate the ratios, in which were affected by the loss. Selected RatiosSBUX 2013SBUX 2012SHORT-TERM DEBT PAYING Cash Ratio.60.92 Quick Ratio.711.14 Current Ratio1.021.9LIQUIDITY ACTIVITY RATIOS Accounts Receivable Turnover21.0121.68 Days to Collect A/R17.3816.84 Inventory Turnover5.744.68 Days to Sell Inventory63.5577.95ABILITY TO MEET LONG-TERM OBLIGATIONS Debt to Equity1.57.6 Times Interest Earned-11.5961.08PROFITABILITY RATIOS Earnings Per Share – Basic.011.83 Gross Profit Percent.57.56 Profit Margin-.03.15 Return on Assets-.02.25If management faced tremendous pressure regarding Starbucks’ financial performance, what opportunities might exist for them to engage in fraudulent financial reporting?They can mask their activities due to the significant differences within the segments. Due their reliance on their America’s segment and a substantial amount of net revenues from it, they could find a way to fraudulently misstate revenues and expenses within their other global segments. In contrast, they could also easily misstate their America’s segment because it is clearly their best producing segment. Due to the fact that one of their business risks is production and costs of their major raw material, organic green coffee beans, there is potential to misstate production, distribution, and expenses associated with it. Failure to meet market expectations will affect their market prices and volatility of their stock, and given that Starbucks’ stock is higher than the rest of the industry, there will be pressure to misstate anything associated with meeting those expectations. To what extent do you believe it will be appropriate to reduce assessed control risk?We believe that assessed control risk can be slightly reduced. This is due to the company’s core values of maintaining control of their brand and distribution of its products. They are willing to take a hit by losing litigation, i.e. Kraft Foods, to maintain the level of control that meets their values. Along with effective segregation of duties and proper documentation and recording procedures, they can maintain the current level of control risk to continue a proper and sufficient audit has been conducted. What form of auditors’ report do you expect will be issued?Based on the information contained in the 2013 Annual Report, the financial ratios assessed, and the previous auditor’s history with Starbucks, we expect an unqualified opinion will be issued. Works CitedAnnual Reports | Investor Relations | Starbucks Coffee Company. (2013). Retrieved February 25,2014, from Starbucks website: . (2013, March 19). Why Starbucks (SBUX) Is Up Today - TheStreet. Retrieved?March?22, 2013, from Stock Quote | Starbucks Corporation Stock Price (NASDAQ:SBUX) | Nasdaq: SBUX | 4-Traders. (n.d.). Retrieved?March?13, 2014, from (2013). Starbucks Corporation Corporate Governance Principles And Practices For The Board Of Directors. Retrieved March 28,2014, from (n.d.). Company Profile. Retrieved?April?1, 2014, from (n.d.). Starbucks Foundation | Starbucks Coffee Company. Retrieved?April?5, 2014, from (n.d.). Our Relationships | Starbucks Coffee Company. Retrieved?April?15, 2014, from ................
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