Just For Feet Case Summary

In the auditing class I was taught that when the risk of material misstatement is high, the detection risk should be set low by the external auditing company. The Just for Feet case is the perfect example to explain the reasoning behind this statement. By setting very sloppy to no internal controls and having external auditors with such an easy-going attitude, there were some inherent risks that were made more likely to translate as a material misrepresentation of assets, revenues, and expenses on Just for Feet’s financial statements. In the case, there was some inherent risks in the retail industry like vendor allowance and inventory obsolescence. These were made worse by some decisions taken by Just for Feet sketchy management and Deloitte’s lack of professional skepticism. This case pointed out that Deloitte was not representing the interest of their shareholders, but too concerned with keeping a client.

the retail industry is highly competitive which means a product could pass from highly seek to a “dust collector” in a matter of a few months. This makes valuating inventory very hard. Deloitte asserted this statement by strictly defining what was to be considered obsolete inventory and setting a wide amount range for what was to be considered obsolete. However, Just for Feet’s estimate was around 63% lower than Deloitte’s lower range. Deloitte did not thoroughly check such a discrepancy even after noticing category #3 for obsolete items was totally ignored a WHOLE warehouse was omitted from inventory count. Both omissions suggest a complete lack of effective internal control. This converted the possibility of material misstatement from a probability to an almost certainty. One of these errors could be taken as a human error or a side effect of negotiation to arrive to an unqualified opinion. However, what took place in this case was the result of mixing fraud by collusion with lack of professional