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Question: Anne Aylor, Inc. (Anne Aylor) is a


Anne Aylor, Inc. (Anne Aylor) is a leading national specialty retailer of high-quality women’s apparel, shoes, and accessories sold primarily under the “Anne Aylor” brand name. Anne Aylor is a highly recognized national brand that defines a distinct fashion point of view. Anne Aylor merchandise represents classic styles, updated to reflect current fashion trends. Company stores offer a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories coordinated as part of a total wardrobing strategy. The company places a significant emphasis on customer service. Company sales associates are trained to assist customers in merchandise selection and wardrobe coordination, helping them achieve the “Anne Aylor” look while maintaining the customers’ personal styles.
The company follows the standard fiscal year of the retail industry, which is a 52- or 53- week period ending on the Saturday closest to January 31 of the following year. Net revenue for the year ended February 1, 2018 (referred to as fiscal 2018) was $1.2 billion and net income was $50.8 million.
At the end of fiscal 2018, the company operated approximately 584 retail stores located in 46 states under the name Anne Aylor. The company’s core business focuses on relatively affluent, fashion-conscious professional women with limited shopping time. Substantially all of the company’s merchandise is developed in- house by its product design and development teams. Production of merchandise is sourced to 131 independent manufacturers located in 19 countries. Approximately 45 percent, 16 percent, 13 percent, 12 percent, and 9 percent of the company’s merchandise is manufactured in China, Philippines, Indonesia, India, and Vietnam, respectively. Merchandise is distributed to the company’s retail stores through a single distribution center, located in Louisville, Kentucky.
Anne Aylor stock trades on The New York Stock Exchange and Anne Aylor is required to have an integrated audit of its consolidated financial statements and its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). As of the close of business on March 14, 2018 Anne Aylor had 48,879,663 shares of common stock outstanding with a trading price of $22.57.
BACKGROUND
Your firm, Smith and Jones, PA., is in the initial planning phase for the fiscal 2019 audit of Anne Aylor, Inc. (i.e., the audit for the year that will end on January 31, 2019). As the audit manager, you have been assigned responsibility for determining planning materiality and performance materiality for key financial statement accounts. Your firm’s materiality and performance materiality guidelines have been provided to assist you with this assignment (see Exhibit 1).
Donna Fontain, the audit partner, has performed a preliminary analysis of the company and its performance and believes the likelihood of management fraud is low. Donna’s initial analysis of the company’s performance is documented in the memo referenced as G-3 (top right hand corner of the document). Additionally, Donna has documented current events/issues noted while performing the preliminary analysis in a separate memo, G-4.You have recorded the audited fiscal 2018 and projected fiscal 2019 financial statement numbers on audit schedule G-7. The company’s accounting policies are provided in Exhibit 2. Assume no material misstatements were discovered during the fiscal 2018 audit.
REQUIRED
[1] Review Exhibits 1 and 2; audit memos G-3 and G-4; and audit schedules G-5, G-6 and G-7. Based on your review, answer each of the following questions:
[a] Why are different materiality thresholds relevant for different audit engagements?
[b] Why are different materiality bases considered when determining planning materiality?
[c] Why is the materiality base that results in the smallest threshold generally used for planning purposes?
[d] Why is the risk of management fraud considered when determining performance materiality?
[e] Why might an auditor not use the same performance materiality amount or percentage of account balance for all financial statement accounts?
[f] Why does the combined total of individual account performance materiality commonly exceed the estimate of planning materiality?
[g] Why might certain trial balance amounts be projected when considering planning materiality?
[2] Based on your review of the Exhibits (1 and 2) and audit memos (G-3 and G-4), complete audit schedules G-5, G-6 and G-7.



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Net sales for the first q uarter of fiscal 2019 increased 1.5 percent from the first quarter of fiscal 2018. Comparable store sales for the first quarter of fiscal 2019 increased 0.5 percent, compared to a comparable store sales decrease of 0.2 percent in the first quarter of fiscal 2018. Despite soft customer traffic across the industry, the Company saw improvement in same store sales as a result of a targeted promotional strategy and improved product offerings that helped drive increased traffic to Company stores. Based on their current strategy and performance to date, the company expects to achieve net sales growth of approximately 5 percent for the 2019 fiscal year compared to 3.5 percent for fiscal 20 18. Net sales growth for the company’s market sector is expected to be approximately 3 percent for the 2019 fiscal year.

Gross margin as a percentage of n et sales increased to 51.5 percent in the first quarter of fiscal 2019, compared to 51.0 percent in the first quarter of fiscal 2018. The increase in gross margin as a percentage of net sales for the first quarter of fiscal 2019 as compared to the comparable fiscal 2018 period was due primarily to h igher full price sales as a percentage of total sales coupled with higher margin rates achieved on both full price and non-full price sales at stores. This performance was the result of improved product offerings a nd effective targeted marketing initiatives.

Selling, general and administrative expenses as a percentage of net sales decreased to 47.2 p ercent, in the first quarter of fiscal 2019, compared to 48.0 percent of net sales in the first quarter of fiscal 2018. The decrease in selling, general and administrative expenses as a percentage of n et sales was primarily due to improved operating leverage as a result of higher net sales, tenancy related savings a ssociated with the store remodel program, and continued focus on cost savings initiatives. The decrease in selling, general and administrative expenses was partially offset by h igher marketing and performance-based compensation expenses.
Net income as a percentage of net sales increased to 2.6 percent in the first quarter of fiscal 2019, compared to 1.8 percent in the first quarter of fiscal 2018. The increase in net income as a percentage of net sales is due to improved full price selling at Company stores and improved operating efficiencies. Based on their current strategy and performance to date, the company expects to achieve net earnings before taxes growth of approximately 23 percent for the 2019 fiscal year compared to 18 percent for fiscal 2018.
The company plans to focus on optimizing store productivity and enhancing the in- store environment of existing stores. Last year the Company remodeled 4 stores with updated aesthetics and reducing the square footage 30-40%. The Company intends to remodel an additional 25 stores d uring fiscal 2019 following the remodeled prototype developed last year. The remodeling will be funded with operating cash flows.

On March 18, 2 019 the Company entered into the credit facility with First Bank and a syndicate of lenders, which a mended its existing $1 50 million senior secured revolving credit facility which was due to expire in October 2019. The credit facility provides the Company with an option to increase the total facility and the aggregate commitments thereunder up to $200 million, subject to the lenders' a greement to increase their commitment for the requested amount. The credit facility expires on S eptember 30, 2024 and may be used for working capital, letters of credit and other general corporate purposes. Should certain liquidity and other requirements not be met, as defined in the credit f acility, no additional funds can be b orrowed and any o utstanding borrowings may become immediately payable. The credit facility requires that the Company maintain a working capital balance of $125 million a nd quick ratio of 0.65. Additionally, the Company is only allowed to repurchase common stock up to $100,000 in any fiscal year.



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