Scribd
Upload
667 views

Chipotle Audit Case

Chipotle faces business risks from competition in international markets and supply issues. These risks could lead to misstatements in accounts payable and revenue. Management must make significant estimates and judgments regarding leasehold improvements, including the amortization period and depreciation estimates, which could materially impact the financial statements if incorrect.

Uploaded by

dylanfranklin9
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
667 views

Chipotle Audit Case

Chipotle faces business risks from competition in international markets and supply issues. These risks could lead to misstatements in accounts payable and revenue. Management must make significant estimates and judgments regarding leasehold improvements, including the amortization period and depreciation estimates, which could materially impact the financial statements if incorrect.

Uploaded by

dylanfranklin9
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

ACIS 3414 Case 7

Pretend that your audit firm has been appointed as the new auditor of Chipotle Mexican Grill, Inc. (Chipotle) for the year-ended December 31, 2014. Your manager has performed the initial audit planning and asked you to take the first pass at understanding the entity and its environment, assessing client business risks, and assessing risks of material misstatement. To begin doing so, you should perform the requirements below. Please work in groups of no more than 3 people to prepare your response. Requirements: 1) Perform the following to gain an understanding of Chipotles business and environment and assess its business risks: a. Identify one important characteristic of Chipotles industry and external environment. Discuss the business risk(s) stemming from this characteristic. Competition is one important characteristic of Chipotles industry and external environment. For example, Chipotle expansion into international markets may present increased risk due to lower customer awareness of the brand. Chipotle is relatively new to the international stage. Because of this, they lack the competitive edge from brand recognition that they have in the U.S. This could affect revenues for the restaurants in these international market creating a business risk in investing in these markets. Not to mention competition for other food industrys on Wall Street. b. Identify one of Chipotles corporate objectives and its strategy to achieve that objective. Discuss the business risk(s) that potentially could impede Chipotle from achieving this objective. One corporate objective is to find the highest quality ingredients that are grown and raised with respect for the environment. One potential business risk is the lack of suppliers. Natural disasters, weather, even regulation can affect the relatively few suppliers that meet Chipotles strict standards. This could lead to an increase in price, which may reduce margins or drive customers away depending on the decision made. Because the market for Chipotles ingredients is relatively small, price fluctuations in the market may frequently occur leading to uncertainty. 2) Select two business risks identified above and discuss how each risk may increase the risk of material misstatement in Chipotles financial statements (i.e., identify the inherent risk and which financial statement accounts it may affect). They have many smaller suppliers as opposed to one big one which could lead to improper billing leading to misstatement of Chipotles Accounts Payable. Their growth strategy in international markets may lead to lower future cash flow than expected because they dont have as much brad recognition internationally as compared to the US. This may lead to misstatement of revenue estimates or other things of that nature.

Adapted from KPMGs 2013 ALPFA Case Studies

ACIS 3414 Case 7


3) Risk assessment also occurs at the financial statement level. Your manager asked you to look into the significant accounting issue of Leasehold Improvements, Property and Equipment. a. Describe the Chipotles accounting treatment. Chipotle records leasehold improvements, property and equipment at cost. They recognize rent expense using straight-line method over the lease term. They depreciate most of their leasehold improvements over the lease term. The lease term is only reasonably assured and is an estimate. Due to this, the estimate of the lease term may change which could cause a material difference between depreciation and rent expense. Also, leasehold improvements are amortized over the shorter of: the lease term, including reasonably assured periods, or the estimated useful life of the assets. They also have to estimate residual value at the end of the useful life. b. Note the significant estimates and judgments that management must make in applying appropriate accounting standards (you can, but are not required to, reference specific technical standards in your response). Chipotle must make significant estimates for this section of the financial statements. They have to estimate the amortization period for Leasehold Improvements. The proper way to determine this was discussed by the FASB Emerging Issues Task Force in Issue No. 05-6. According to Paragraph 11(b) of FAS 13 states that assets recognized under capital leases be amortized in a manner consistent with the lessees normal depreciation policy except that the amortization period is limited to the lease term (which includes renewal periods that are reasonably assured). Also, the time period of the depreciation or amortization must be the shorter of: the useful life of the leasehold improvements, or the remaining years of the lease. The remaining years of the lease is the years that are assured and also the years that are reasonably assured.

To best understand and respond to the above questions, it may help you to think through the overall business model of Chipotle, including its targeted customers, products and/or services, markets and competitors, key business processes, and external forces that impact the companys ability to meet its strategic objectives.

Adapted from KPMGs 2013 ALPFA Case Studies

You might also like