USANA Audit
When a company is publicly
traded, they must have their financial statements and business practices
audited on a yearly basis to verify compliance with the Generally Accepted
Accounting Practices (GAAP). But this
can still be a frustrating and stressful event as all of the company’s
financials, management practices, legal and compliance activities, and internal
controls come under scrutiny to ensure that they accurately and efficiently
illustrate the operations and health of the company.
USANA Health Sciences is a
publicly traded company based out of Salt Lake City, Utah that for the last 20
years has focused on providing the general public a pharmaceutical grade,
science based, all-natural, skin care, dietary, and nutritional supplement line
grossing nearly $600 Million during the 2013 fiscal year (Yahoo, 2014). During
the first quarter of the 2014 fiscal year the company reached a monumental mile
stone as they topped $2.5 billion in total commissions paid to their associates
and their stock values reaching the record high of $70.45 per share (Alaniz,
2014). Because the company provides a product that is consumable, it is held
responsible for maintaining the highest level of manufacturing codes as well as
meeting requirements for the manufacturing of nutritional supplements as
dictated by the FDA. As a Network Marketing Company, they are also regulated by
the laws regarding multilevel marketing and advertising regulations outlined by
the Federal Trade Commission. USANA Health Sciences has 19 international
markets necessitating that they maintain international distribution trade and
tariffs compliance as well. With so many different elements of human
interaction, product manufacturing and distribution, client, associate, and
employee accounts, extensive technology use, numerous charity programs, as well
as the physical facilities used by the company, there are many aspects that an
auditor would want to review. To begin the process the auditors will begin by
identifying the areas of highest risk in the company.
As with all business activities,
there is a certain amount of risk involved in auditing the company’s financial
statements and business practices. Audit
risk is the term utilized to describe the possibility that the auditor will not
discover errors or fraudulent activities while reviewing a company or
individual’s financial statements due to inappropriate testing or careful
masking by the company. These risks can
be associated with the assessment of actual financial materials or associated with
the assertions produced by the evaluation of financial statements (Rittenberg
& Johnstone, 2011). However, there
are many steps that a company can take to mitigate or minimize the possibility
of activities or situations occurring that could produce the misstatement of
company financials or procedures.
The first step in determining the
best route to mitigating audit risks is to identify the areas within the
company where risk is more likely to be prevalent. Risk areas can include IT or technology
areas, project management functions, organizational procedures, financial
practices, compliance regulations, and external factors (Edmead, 2007). While external risks include factors outside
of the company’s control such as natural disasters, there are still ways to
plan for and minimize the amount of impact it could potentially have on the
company. To minimize the risk in areas
which the company can control they may want to utilize selective information
sharing that is specific to job descriptions, thus minimizing the possibility
of information lacking necessary security or being used improperly. There should also be an established set of
internal controls which create a specific set of guidelines for how job
processes should be executed, who has accessed to controlled information, and
steps to be taken in the event that situations arise where more detailed procedural
analysis is necessary. Unfortunately it is not possible to eliminate all risks
and therefore those areas that pose a potential threat should be analyzed and
controls put in place to bring it to an acceptable risk level. This represents the
value of human or material loss from industry processes that are considered
tolerable by society and authorities within the confines of social, political,
and economic cost benefit analysis (Business, 2014).
When auditing any company, the
auditor will want to focus more attention on the accounts where misstatements
are most likely to occur and where the company seems to be more vulnerable.
Auditors of the financial statements will look at the accounts that are
directly linked to the cash cycle – specifically the accounts payables, inventory
assets, and accounts receivables. Utilizing the information provided in
previous audits, current accounting records, and the company’s policies and
procedures, they are going to look specifically for accountability and
transparency of all levels of management and compliance with all policies
specific to the separation of duties. A weakness in any of these areas will
trigger a more in-depth and extensive scrutiny of the company’s financial
records. Because it is the cash cycle that will be under review, the auditors
will look at the accounts payables to ensure that there are procedures for
purchasing, receiving, and payment. Inspection of the Inventory accounts
requires that steps are in place to verify and process orders, shipping and
receiving of products, verification of products, and steps to account for raw
materials used during manufacturing processes. The accounts receivables are a
significant player in the cash cycle and should also be reviewed for effective
order processing, shipping, billing, and payment receipt practices.
Accounts payable is the largest
of the liability accounts and can be a significant indication of the company’s
financial health. In large companies, like USANA, purchases are made against
lines of credit with payment term that have been agreed to by both parties. When
liabilities are past due or even excessive, there is a possibility that the
company’s cash flows are not on par with the products being purchased and that
there may be issues in other departments as well. When the auditors look at the
Accounts Payables for the company, they want to see that the purchases were
logged in the appropriate transaction period and that the presentation and
disclosure of the liability are agreeable (AP, n.d.). This is important for
verifying that the quarterly earnings and expenses are properly evaluated and
that they have been expensed to the appropriate accounts on the financial
statements. Auditors will also look to ensure that the liabilities are valid
expenses, a product that is in line with the company’s operations, and that the
purchases were priced according to market value (AP, n.d.). Orders for items
not used in any of the company projects or processes should raise flags as
should bills for items that exceed market value as this could be an indicator
of a toxic or illegal business relationship or money syphoning. In order to
test for these occurrences, the auditors will ask to review Purchase Agreements
with vendors in order to build a better understanding of the terms of the
business agreement, product prices and any associated fees, as well as payment
terms. They may also request Purchase
Orders to ensure there are controls for procurement and authorization of
purchases, Receipt Logs that show that the items orders were actually received,
and finally, proof of payment for the order (AP, n.d.). Failure to produce any
of these documents could indicate an area where the company many need to be
reworked or made more efficient.
Inventory accounts typically
represent the company’s largest asset account and because it is in constant
motion with product being brought in and sold again, there needs to be
efficient inventory controls to minimize the possibility of excessive inventory
or the need for inventory adjustments in the General Ledgers. USANA not only
markets numerous products but they manufacture all of them as well and
therefore auditors will be looking not only at the inventory of products ready
for sale but also at the raw materials acquisitioned for the manufacturing
process. Some of the processes that are audited in inventory are warehouse
cutoff procedures, which allows warehouse managers to get their receipts logged
in a timely fashion to allow for accurate quarterly reports, as well as the
methods used for inventory counts as changes in these methods could lead to a
significant different in values between reporting periods. If processes have
changed, the auditors will want to see reasons for the changes as well as any
documentation that will support the reconciliations made in the ledgers (Inventory,
2014). Inventory in transit, item costs, freight costs, and inventory
allowances will also be evaluated when auditing inventory value because they
affect the full value of inventory. During the audit of Inventory, documents
like Purchase Orders and Bills of Ladings are used to track raw materials as
they are received while Manufacturing Orders and Bills of Manufacturing track
how much of each raw material has been slated for the production line. After
the products complete the manufacturing process it is necessary for the
warehouses to have Inventory Receipts for the finished product being added to
the inventory that is ready for shipment. When companies manufacture their own
products, they will want to have a pre-determined inventory allowance to
allocate what is an acceptable loss of product during the manufacturing
process. Having numerous inventory adjustment due to product loss could alert
the auditing team to issues with the effectiveness of the manufacturing processes
or with the way that inventory is being moved from one inventory area to
another or even issues with plant security.
The Accounts Receivables are
representative of the company’s sales and projected income for the company.
Some companies operate on a cash basis and will
not have a significant amount of funds, if any, tied up in this account.
Despite the representation of sales that have occurred, the Accounts
Receivables will also indicate which accounts have still not issued payment for
the goods or services that they received. As with the Accounts Payables, these
accounts will be compared with previous period records and the industry
averages to ensure that they are within acceptable levels. When auditing the
receivables accounts, the auditor will look first for evidence that the sale
actually occurred and will want purchases order or invoice with the client’s
information, the product and its unit price, and the invoice total clearly
annotated. On USANA’s invoices the client can not only see the date the order
was placed and processed, the products listed individually with either their
unit price or case price beside it as they will ship both ways, but all costs
associated with the chosen method of shipment and payment receipt details as
well. While this is very convenient for the customer, the auditors will want to
see more than just the invoice to validate that the sale actually occurred. Some
auditors will choose to contact clients to verify that the sale and the amount
of the receivable matches their records however, if the receivable is comprised
of numerous small accounts, they may choose to forgo this process if there is
no clear indication that the bill will not be paid (AR, nd.). Shipping logs are used to verify that the
orders went out in a timely fashion and check stubs or payment receipts are
attached to the invoices to show that the sale was complete. Auditors will also
look at the company’s return policy and the sales and return allowances to analyze
what portion of the company sales are being sent back and that they are being
properly annotated on the financial statements. Extensive Aging Reports could
indicate that the company has a problem with obtaining payment for their
services or that there is a problem with the return policy and the
reimbursement of funds to the customer. Not always by any fault of their own,
most companies will be required at some point to write off an account as bad
debt but because of the nature of the account, is likely to come under close
scrutiny by the auditors as it would be very easy for an individual to write
off an account as bad debt and then pocket the payment for themselves. When
Accounts have been moved to bad debt, the auditors will want to see that sufficient
attempts were made to reconcile the receivable, the account went through the
appropriate authorizations before being written off, and may also choose to
contact the client to verify that the account was indeed written off (AR, n.d).
By comparing the bad debt accounts to the Aging Account Summery the auditors
can also determine how much of the current aging accounts are likely to be
written off as well.
When an auditor gives an opinion
on the company’s financial records, they are inferring that all transaction
recorded during the past fiscal year have been processed correctly from start
to finish. Testing every client and vendor transaction that took place,
especially in a multi-million dollar company, would be time consuming and
impractical and there is still a possibility of something important being
overlooked. In order to obtain a clear picture of the company’s financials,
what processes are in place, and to test individual accounts for the
possibility of misstatements, auditors will employ a test ratio known as
Sampling. Audit sampling is the application of an audit process to a population
of a transaction class or account, with the purpose of evaluating the
application of internal controls. The population of sampling is typically less
than 100% of the class or account variables but must still present an accurate
representation of the account as a whole (AICPA, 2014). While it would be
easier to audit smaller variables with fewer transactions, these transactions
may not be typical to the company or even representative of the volume of
inventory that is moved in each transaction and therefore should not be used as
the basis for a test sample. Because USANA has 19 unique international markets,
three manufacturing plants, and a few select third-party vendors, the auditors
will want to look beyond the records and practices of the home office in Utah
to ensure that the internal controls are being employed throughout the numerous
layers of the organization. When sampling for the accounts payables, the auditors
will need to look at payables that relate to the third party manufactures, raw
material vendors, as well as those relating to general operations of the
facilities. They may choose to contact these groups to verify the shipments,
price and products, as well as payment of the account. Population samples for
inventory accounts would include documentation for acquisition of raw
materials, allocation and movement of raw materials to production, and then the
finalized products to staging areas for shipment. Because manufactured products
are warehoused in certain locations throughout the international markets,
auditors will want to compare warehouse inventories to shipping logs to ensure
that inventory valuations are true representations of what actually exist within
the company. Sampling the Accounts Receivables for USANA would be a vast
undertaking as they reported 265,000 active associates and 78,000 preferred
customers in 2013 (USANA, 2014). Therefore, the auditor would choose to take a
sample population from each of the international markets to test for order
receipts, shipping orders, and payment receipts. Given that the majority of
USANA’s transactions occur in on-line marketplaces they will want to test the
security measures for these accounts as well as the information itself. When
sending out confirmations to vendors and clients the auditor will want to get a
100% confirmation of the accounts. However, the likelihood of this occurring is
not guaranteed and therefore they will look to get an 80-90% return on their
inquiries.
Audits are time consuming,
expensive, and sometimes aggravating for the company’s employees even though
they know they are necessary. Some companies however, are privately owned or
very small and do not require a full audit of their financial statement. In
lieu of this, they may opt to have a review or compilation performed instead.
In full audits however there are two levels of assurance that have been
outlined by the International Auditing and Assurance Standards Board (IAASB). A
reasonable assurance level is given to audits which have gone more in-depth
into the company’s financial records and the auditor is willing to express a
formal conclusion about the outcome of the evaluation and its supporting
evidence. These assurances are always issued to third parties to validate
specific criteria, and the measurements done on them, that were specified
either in the audit framework or during a previous audit as being an area that
posed significant risk. These opinions, criteria, and documentation are
presented to the user in a formal report that validates a reasonable assurance
of the information presented. Conversely though is a limited assurance level
which requires less work and time, but often leads to higher risk levels or
even a negative assurance because sufficient testing of the financial
statements has not been performed. Some companies may choose to start with a
limited assurance audit and then escalate to a reasonable assurance level if
the preliminary audit indicates issues that require more in-depth testing (Rittenberg
& Johnstone, 2011).
Many of the risks that auditors test
for are directly related to the types and effectiveness of the company’s
internal controls and can encompass anything from lost, altered, or incorrectly
recorded transactions, improperly valued transactions, or even transactions
that are have no correlation with the company’s operations. By having a solid
set of internal controls in place, a company can minimize the chance that these
kinds of situations might occur. Segregation of Duties and Authorization
Procedures are two of the more important internal controls as these ensure that
decisions are made by the appropriate individuals and that those that have
access to and are handling certain information are qualified to do so (Rittenberg
& Johnstone, 2011). By having different individuals responsible for the
processing of transactions and the physical management of the accounts
minimizes the possibility that fictitious payments being issued or entries
being made to cover up other fraudulent activities. For example, the person who
writes the checks should not be the same as the person who signs them. Internal
controls also require that there is adequate documentation that the
transactions are authorized by the appropriate management chains and that they
were executed in a timely fashion (Rittenberg & Johnstone, 2011). This
documentation should also include any communications between the customer and
company regarding the order and any changes that were made to the initial
transaction. Equally important to making sure that only qualified individuals
have access to certain information are the internal controls that are in place
to physically safeguard client information and company assets (Rittenberg &
Johnstone, 2011). These kinds of controls can be as complicated as close
circuit security cameras and guards, to magnetic key card locks on secure
areas, to computer access code, to the simple filing cabinet in the HR
department. They do not have to fancy or expensive as long as they are effective.
The last internal control that is specific to the financial statements is the
recording of account reconciliations. It is important for these entries to be
put in by someone other than the person who made the initial entries as this
would be an opportune time to cover up intentional misstatements of the
company’s assets and expenses (Rittenberg & Johnstone, 2011).
In their 2013 Financial Statement
report, the USANA directors note the importance of having a strong set of
internal controls but admits that no matter how well structured the set of
internal controls are, there are inherent limitations to how much or the kinds
of misstatements they catch. The Board of Directors at USANA assert that their
internal controls are “designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company’s
financial statements for external purposes in accordance with generally
accepted accounting principles”. The financial statements also indicate that
the internal controls are reviewed on an annual basis and that at the time that
the report was issued, the controls were operating effectively with respect to
the criteria and guideline issued by the Committee of Sponsoring Organizations
(COSO). The report also states that there were no changes made to the USANA
internal controls during the 2013 fiscal year (USANA, 2014). One of the most
notable of USANA’s security measures is in the level of security associated
with their online services, with associates and customers have access to
different information tailored to their participation in the company, and each
user requiring a unique and protected log-in. While certain amounts of payment
information is stored in the user profile, on a regular basis the user has to
revalidate the card “on file” which minimizes the possibility of credit card
fraud.
Report of the
Independent Auditor
To
Dr. Myron Wentz and the Board of Directors
USANA
Health Sciences
3838
West Parkway Blvd.
Salt
Lake City, Utah 84120
Our
team of auditors was retained by the Board of Directors at USANA Health
Sciences, headquartered in Utah, United States, to perform a General Audit of
their Financial Statements and the integration of their internal controls and
to give an opinion as to their continuity as of December 31, 2013. The company’s
Income Statement, Balance Statements, Retained Earnings, and Cash Flow
Statements are the responsibility of USANA’s management and have been given to
us to offer a professional audit opinion.
The
audit of USANA Health Science’s financial statements was performed in
accordance with the Public Company Accounting Oversight Board (PCAOB) and in
accordance to the guidance of the Generally Accepted Auditing Standards (GAAS).
While the audit can provide only reasonable assurance that the financial
statements contain no material misstatements, our team has closely examined all
of the sample evidence to ensure that all internal controls are in place and
are working effectively. Our opinions are based on tests applied to the
Accounts Payables, Inventory, and Accounts Receivable and all subsequent account
activities and applicable documentation.
Our
opinion is that the financial statements of USANA Health Sciences, as of
December 31, 2013, have been presented fairly and accurately in accordance to
the US Generally Accepted Accounting Practices (GAAP) and do not contain any
discernable misstatements.
Rachel E. Presley
Rachel
E. Presley
Completed
May 11, 2014
Resources
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(2014). Audit Sampling. Retrieved from the AICPA webpage:
http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00350.pdf
Alaniz,
E. (May 8, 2014). $2.5 Billion and Growing Strong. Retrieved from the WhatsUp
USANA
webpage: http://whatsupusana.com/2014/05/infographic-usana-growing-strong/
AP
(n.d). Auditing Accounts Payables. Retrieved from the Southeastern Missouri
State University
webpage: http://www4.semo.edu/gjohnson/notes/auditing%20procedures%20-%20payroll.htm
AR
(n.d.) Auditing Accounts Receivables. Retrieved from the Southeastern Missouri
State University
webpage: http://www4.semo.edu/gjohnson/notes/auditing%20procedures%20-%20accounts%20receivable.htm
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webpage:
http://www.accountingtools.com/inventory-audit-procedures
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L., Johnstone, K. (2011). Auditing – A Business Risk Approach 8th
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USANA
(2014). The USANA Difference. Retrieved from the USANA Health Science’s
webpage:
http://www.usana.com/dotCom/about/index
USANA
(2014). USANA Health Sciences 2013 Annual Report. Retrieved from the USANA
Health
Sciences webpage: http://phx.corporate-ir.net/phoenix.zhtml?c=95179&p=irol-irhome
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