case D4 Asher Farms Inc. Understanding of Client's Business Environment Manx S, BEASLEY - FRANK A. BUCKLESS ‘ STEVEN M. Grover - Douc1as F. PRawiTt LEARNING OBJECTIVES After completing and discussing this case you should be able to [1] Describe the implications of an audit client's _{@] Identify factors affecting an audit client's business environment on the audit engagement environment and related business risk strategy {91 Link business risk factors to the risk of material misstatements in financial statement accounts INTRODUCTION Asher Farms, Inc. is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. Asher Farms sells ice pack, chill pack and frozen chicken, in whole, cut-up and boneless form to retailers, distributors, and casual dining operators principally in the southeastern and southwestern United States. During its fiscal year ended October 31, 2014 the company processed 343.6 million chickens, or approximately 2.0 billion dressed pounds. Based on industry statistics, Asher Farms is one of the largest processors of dressed chickens in the United States based on estimated average weekly processing. Asher Farms’ ‘common stock is traded on the NASDAQ national market with an aggregate market value of $677 million on October 31, 2014. Asher Farms’ chicken operations presently encompass 7 hatcheries, 6 feed mills and 8 processing plants employing 1,059 salaried and 8,646 hourly employees. The company has contracts with operators of approximately $30 broiler farms that provide the company with sufficient housing capacity for its current operations. Asher Farms also has contracts with 173 breeder farm operators and 44 pullet farm operators. INFORMATION ABOUT THE AUDIT Asher Farms 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 t Accounting Oversight Board (United States). Your firm, Smith and Jones, PA., recently accepted Asher Farms as an audit client and as a staff auditor you have been asked to obtain some preliminary information about the poultry industry to provide a basis for understanding the client's business environment. Background information about the poultry industry from Smith and Jones’ industry database is provided for your review. The cave was prepared by Mark S Beasley, Ph.D. and Frank A. Buckles, PhD. of North Carolina State University nd Steven M. Gloves, PD. and Douglas F Prawit, Ph.D. of Brigham Young Univer, aa basi for lass discussion. Asher Farms Ines tious company. ll characters and names reprerented are cious ny silaity to existing companies or persons is purely coincidental © 2015 Peorson Education In 5Section 2: Understanding the Client's Business and Assessing Risk REQUIRED 1 fa 1 ‘A.useful approach for understanding a client's business environment and associated business risks is to perform a PESTLE analysis. PESTLE is an acronym for Political, Economic, Social, ‘Technological, Legal and Environmental factors that are used to asses the client's business environment, A PESTLE analysis focuses on factors that may affect an entity's business model, but are beyond the control or influence of the client. While beyond management's direct influence, such factors may significantly impact an entity's business risk. Read the background information about the poultry industry and conduct additional research on the internet to obtain the latest news and information on the industry. Brainstorm political, economic, social, technological, legal and environmental factors that could affect Asher Farms’ business risk. Unless your instructor indicates otherwise, identify at least one business risk factor for each component of the PESTLE acronym. For each of the business risk factors identified in question 1 above, indicate how each risk factor might impact the risk of material misstatements in specific financial statement accounts or disclosures. Professional auditing standards provide guidance on the auditor's consideration of an entity's business environment and associated business risks. (2) What is the auditor's objective for understanding an entity's business environment? (b) Why does an auditor not have responsibility to identify or assess all business risks? (c) Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit. (d) Provide some additional examples of business risks that might not lead to a risk of material misstatement in the financial statements. (© 2015 Person Eduction ne.‘Smith and Jones, PA. Background Information: Poultry Industry Consumption Over the past decade, both the mix of meat products, which includes beet, pork, chicken, and fish related Products, and actual levels of per capita consumption within many nations has changed. dramaticaly. |improved technologies and infrastructure development has expanded production and trade in meat products. At the same time, changing lifestyles, incomes, and a growing awareness of health issues related to meat Consumption altered the pattems of meat demand worldwide. The large increase in meat consumption has been largely met by the worldwide growth in intensive livestock production, particularly poultry. This is. expected to continue as real income grows in the emerging economies around the world The U.S. poulty industy is the word's largest producer and second largest exporter of poultry. U.S. ‘consumption of poutty (broilers, other chicken, and turkey) is the fastest growing segment of all meats. Per Capita consumption of meats in the United States from 1988 to 2012 is presented in Figure 1 (Source: U.S. Department of Agriculture) Figure 1: US Beet, Pork, Chicken and Fish Consumption Ree ea eae eee ack wn Sethe —ehcten = + Fastin With about 18 percent of total poultry production being exported, the U.S. poultry industry is heavily influenced by currency fluctuations, trade negotiations, and economic growth in its major importing markets, Production US. broiler chicken production is concentrated in a group of States stretching from Delaware, south along the Atlantic coast to Georgia, then westward through Alabama, Mississippi, and Arkansas. The top broiler- Producing State is Georgia, flowed by Arkansas, Alabama, Mississippi, and North Carolina. The poultry Production industry faces issues common to most businesses, as well as issues that are unique to agriculture and the production of animal-based food products (© 2015 Pearson Education, Ine. 53