W5

PAPER INFORMATION:

You will be looking at Pepsico Inc and Coca Cola Co for the fiscal year ended 2015 and completing a variety of analysis on both of these companies.

 

 You will specifically be using:
· Pepsico Inc 2015 annual report
· Pepsico Inc 2015 10-K
· Pepsico Inc 2015 Def 14A
· CocaCola Co 2015 annual report
· CocaCola Co 2015 2015 10-K
· CocaCola Co 2015 Def 14A

ANALYSIS REQUIREMENTS:

Part II.  

 

g.  Consider the inventory accounts on the balance sheet for each company, along with the accompanying footnote.  What are the most relevant assertions that management is making with regard to its inventory?

 

h.  What assertions are implied in the Property, Plant, and Equipment account?  How would valuation be affected if each company decided to downsize and eliminate some of its storefront locations?

 

i.  Examine the assets on the balance sheet of each company.  Identify the assets that are subject to (1) fair value adjustments, (2) impairment tests, (3) estimates to either net realizable value or lower of cost or market value.  What are the implications for audit evidence that will be gathered for these accounts?

 

j.  Consider the debt account on each balance sheet, along with the accompanying footnote.  What are the most relevant assertions that management is making with regard to its debt?

 

k.  Describe the primary risks facing PepsiCo.  Describe the primary risks facing CocaCola.  Compare the risks of PepsiCo and CocaCola.  Why would an auditor be concerned with these risks?

 

l.  What are the key revenue accounts for PepsiCo and CocaCola?  What accounts involve critical accounting estimates?  What do their footnotes say about the use of accounting   estimates?  What risk do these estimates pose for the auditor?

 

m.  What are the key cash and liquid asset accounts for each company?  What types of marketable securities do each company possess?  What are the critical accounting policies for these accounts?

 

n.  Review the statement of cash flows and management discussion and analysis related to the liquidity of each company.  What are the significant trends that you note?  What are the audit implications of the different trends of each company?

WRITING/PRESENTATION REQUIREMENTS:

The total writing requirement is a minimum 12 pages for week 7 (not including cover page, abstract, references, or exhibits) using APA 6th ed. formatting. You should have a minimum of 6 peer reviewed references and/or authoritative references (FASB Codification System, SOX, COSO, COBIT, etc.) in total.  Parts I and II should be a minimum of 4 pages not including the cover sheet or reference page

Running head: COCA COLA AND PEPSI
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COCA COLA AND PEPSI
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An Analysis of Coca Cola and Pepsi

Adv Auditing Theory and Application

January 26, 2020

An Analysis of Coca Cola and Pepsi

The History of Coca Cola

Coca Cola is considered one of the pioneers of the drinks and beverages industry in the US. The formula was first created in 1886 by John Pemberton, a pharmacist by profession. He invented the formula which was unique and with no competition in the whole country. In 1889, the unique formula was bought by Asa Candler, who went ahead and incorporated the company in the early 1890s (About us, 2019). Fast forward to 1916, the incorporated company was now able to manufacture a line of its famous bottle that has remained its signature bottle ever since. Robert Woodruff, the company’s CEO in 1920s, focused on the expansion of the company to the overseas and introduced the brand to the Olympics in 1928. It became known to many people and by 1950, the brand was popular not only in the US, but also other areas and regions such as South America (About us, 2019). Following the growing strength of the brand, the company decided to broaden the product portfolio and introduced new flavors in the 1960s such as Fanta, Fresca, and Sprite. The goal was to reach a bigger market and experience a higher level of customer satisfaction. This move was followed by the acquisition of Minute Maid which was entirely a new line of business.

The 1980s saw major changes at the company. Innovation was rapid and new products such as Diet Coke were introduced which became a popular low-calorie drink. The innovation also led to the establishment of the company in other areas such as Europe and Asia. Today, the company has grown and dominated the drinks and beverages industry and is estimated to sell over 1.5 billion servings every day (About us, 2019). Notably, the company focuses on all segments, especially due to its cost leadership and variety of product. However, its profitability levels are facing stiff competition from new entrants that are providing customers with unique flavors and tastes. Coca Cola still dominates due to the strength of the brand and reputation.

A brief History of Pepsi

Pepsico formula that was initially known as Pepsi Cola was first created in 1893 by a pharmacist, Caled Bradham. He used his store as the place for offering servings and could give it names like Brad’s drink. As it became locally popular, he gave it a name and called it Pepsi-Cola. In 1903, Caleb had patented the product and sold soda syrup across the state of North Carolina (About the Company, 2019). By 1910, there were franchisers who were selling the drink in over 20 states. Prior to 1920s, the company changed tactics and resulted in the use of celebrities such as Barney Oldfield to popularize the brand and compete with Coca Cola.

After World War 1, Caleb had forecasted that the sugar prices could continue rising, but fell, leaving him with a sugar inventory that was highly overpriced. The company became bankrupt in 1931 creating a trend where the company went through the hands of several investors. Charles Guth, an investor, bought the company and provided new initiatives that helped revive the brand. During World War 2, the brand was popular among US troops across the globe helping it revive the brand. By the 1960s, the management focused on the baby boomers, who were later called the Pepsi generation. By 1970s, it became a stiff competitor and was poised to replace Coke as the number of one brand in the US. Throughout the 1980s, Pepsi focused on rigorous advertising and diversifying mainly targeting Generation X (About the Company, 2019). Today, the company has diversified the product, hence customers can find a variety of products which promotes its profitability. However, similar to Coca Cola, it is still facing major competitions from new entrants.

A Comparison of Pepsico and Coca Cola

From the above sections, the two companies, compare and contrast. First, both have focused on campaigns that target specific markets such as generation X. This was done through advertising and product diversification in a bid to appeal to certain markets. The two have invested in rigorous advertising with the goal of reaching a wider market. Also, the two companies have created products that target all market segments through pricing. It is a major move for ensuring that a larger market share is attained to drive dominance and profitability. Further, the two companies have invested in expanding to overseas as a means of reaching a global market and help the companies grow.

The two companies contrast, when it comes to strategy and growth. Pepsi has experienced major challenges, including going bankrupt. This led to ownership by several investors who came with new ideas where some worked while others failed. Coca Cola has been consistent mainly due to the introduction of products that did well in the markets. Also, Pepsi has sought endorsements by various parties such as the American Troops and celebrities to promote the brand while Coca Cola mainly focused on dominating its already acquired markets through conventional advertising.

Purpose of Def 14A

Also known as the Definitive Proxy Statement, the form needs to be filed with the SEC and is usually filed by or on behalf of a registrant prior to making a shareholder vote. It is used together with annual meeting proxy and must offer enough information of the security holders to facilitate informed vote by the holders during a meeting or when authorizing a proxy to vote. A proxy must have information on the corporate governance practices.

Auditors of Pepsi and Coca Cola

Pepsico’s financial statements are audited by KPMG and the audit fee for the year 2015 was $22, 641, 000 which was about 0.04% of the total revenues and 0.03% of the total assets. On the other hand, Coca Cola was audited by PWC and the audit fee for 2015 was $38,460,000 which was about 0.03% of the total revenues and 0.044% total assets. The goal of the disclosure is to ensure that investors can evaluate whether the fees will make them question the independence of the auditor. The move promotes transparency.

Internal Control of Financial Reporting

The process is established to ensure there is substantial certainty of the reliability of financial reporting mainly for external purposes. However, inherent weaknesses such as lack of understanding the processes, managerial override, collusion, and human error make the task unreliable (Tysiac, 2014). To address the material weakness, an external auditor can be asked to provide expert opinion.

Coca Cola’s Code of Business Conduct

The main theme is to call for integrity of all the staff working locally and overseas. They need to uphold the company’s core values when meeting performance goals and duties (Code of Business Conduct, 2019). The code is provided in multiple languages to ensure all the staff members are aware of what is expected from them. Any violations of the code will attract penalties in accordance with the company’s policies. However, the code should have entailed the staff members’ role in corporate social responsibility and impacting the lives of others positively.

References

About the Company. (2019, ,May 14). Retrieved from Pepsico: https://www.pepsico.com/about/about-the-company

About US. (2019, November 22). Retrieved from Coca Cola: https://www.worldofcoca-cola.com/about-us/coca-cola-history/

Code of Business Conduct. (2019, December 08). Retrieved from Coca Cola: https://investors.coca-colacompany.com/corporate-governance/code-of-business-conduct

Tysiac, K. (2014). What do public companies disclose about auditor relationships? Journal of Accountancy, 1-13.

Discussion No. 1

Why is it important to determine whether the difference between the customer’s balance shown in the client’s records and the amount confirmed by the customer is the client’s error or fraud, the customer’s error, or a timing difference?  What are the implications of this determination on the conduct of the audit and further investigation of the account balance?

Discussion No. 2

Evaluate the following statement made by a third-year auditor:  “In comparison wit other accounts, such as accounts receivable or property, plant, and equipment, it is my assessment that cash contains less inherent risk.  There are no significant valuation problems with cash.”  Do you agree or disagree with the auditor’s assessment of inherent risk?  Explain.

Comment to NZ

Inherent risk is “the probability that an assertion is materially misstated assuming the client has no related internal control structure policies and procedures” (Levine & Fitzsimons, 1992, para. 14). The inherent risk will vary depending on assertions. For example, accounts with simple calculations would have a lower level of inherent risk and the accounts with complex calculations tend to have a higher level of inherent risk because they are more susceptible to error. The same theory we can apply from accounts to transactions. Transactions that are routine and noncomplex may have a lower level of inherent risk. However, “some routine transactions, such as cash transactions, are more susceptible to fraud and, therefore, have greater inherent risk” (Clack, 2009, para. 9).

In comparison cash with the account such as plant and equipment, “the inherent risk of error in cash could be higher than for plant and equipment since it is more likely to be stolen” (Levine & Fitzsimons, 1992, para. 14). The inherent risk for cash is set at the maximum level (i.e. 100%) and at a reduced amount for accounts and classes of transactions that have less inherent risk – e.g. fixed assets (Levine & Fitzsimons, 1992, para. 14).

Auditors must support their assessments with audit documentation. To make sure if the evaluation is correct, the auditor should apply an alternative procedure to a significant nonresponding account. “For example, in confirming accounts receivable, subsequent cash received on account as well as shipping documents may provide satisfactory sources of evidence of the existence of accounts receivable. On the other hand, for accounts payable, the examination of subsequent cash disbursements and correspondence from third parties provide evidence of completeness” (Levine & Fitzsimons, 1992, para. 34).

Comment to: AH

Fraud is the biggest issues for auditors. As soon as the word ‘fraud’ is mentioned in any audit room around the country the entire engagement goes quiet. No one expects to find fraud, we as auditors are generally trusting people but that doesn’t mean we don’t look for it. When an auditor sees a difference between a client document and a confirmation letter, we must find why it was different.

There are 4 key reasons that there is a difference: client error, customer error, timing difference, and fraud. As auditors we must determine where misstatements found fit into these 4 categories, this is because if a misstatement is found it is telling for auditors what to look for (Messier & Glover & Prawitt, 2018). Say we have a bank confirmation come in for cash account 100 and it is $4,000 off what the client says, if we find it is a timing difference, we can conclude that we have to be cautious for the rest of the audit about timing differences. If it is a customer error, we will conclude that the customer confirmations should not be relied on completely and thus we have to find more evidence to support our conclusion. If it is a client error, we can conclude that there is an issue with their internal controls that we should address with the audit committee. If it is fraud, we will have to bring it up to the audit committee and do further investigation into the extent of the fraud. (Messier & Glover & Prawitt, 2018)