Group a -Revised 3(1)

7/30/2019 Group a -Revised 3(1)

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Group A- Home Depot 1

Internal Audit Group AHome Depot

Akosua Agyeman

Vanya Ballesteros

Edward BaynesGroup Leader

Rosemarie Forde

Maura Medvitz

James Small


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ABSTRACT

Built upon an innovative idea of one-stop shopping for do it yourselfers, Home Depot was

founded in 1978 by Bernie Marcus, Arthur Blank, Ken Langone, and Pat Farrah. Since opening

their first two stores in Atlanta, GA on June 22, 1979, Home Depot has continued to

revolutionize the home improvement industry by bringing the know-how and the tools to

consumers.

In 2010, net sales were over $67 million. Internal Audit Group A has reviewed the Annual

Report and articles that relate to Home Depot. From our research using the available material,

the group has identified areas that are deemed necessary to perform an audit. The areas that

Internal Group A will focus on in our audit are the following: an audit of the organization

structure; a review of Human Resources and Payroll; a thorough review of the financial

statements along with an audit of the cash balances; and the introduction of a new software

system called the Enterprise Resource Planning (ERP) along with the implementation of the

First Phone that was created in order to improve customer satisfaction.


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INTRODUCTION

Topic AOrganizational Structure

A review of Home Depots corporate structure will reveal if the structure is overly complex

as oppose to a comparison of similar businesses within the same industry. The audit will also

take a look at the competency of senior management focusing on proper segregation of duties.

Topic B - Human Resources/Payroll Functions

It is important that a regular review of the different functions within the organization be

conducted in order to check the competency of the functions. As such, the HR/Payroll functions

will be reviewed as part of our operational engagement. The review will focus on looking to see

if these areas need improvement. This will include record keeping, authorization, custody of

payroll checks, and journalizing of transactions in the payroll function and evaluating

managements HR policies and procedures for attracting, training and retaining experienced

associates as part of their motivational effort to improve job satisfaction.

Topic C - Financial Statement Analysis and Audit of Cash Balances

It is important that Home Depots financial statements are reviewed internally on an annual

basis in order to determine if there are any significant changes or anomalies in balances between

the 2009 and 2010 fiscal years. During a preliminary review of the 2010 financial statements

(balance sheet) for Home Depot, there was an $876 million decline in the cash balances between

2009 and 2010. This decline is considered to be material in that it may raise questions and

concerns by the companys investors and creditors. It also may question whether the company

is at risk. The Internal Audit Group A will thoroughly review all 2010 financial statements

including the Balance Sheet and Statement of Cash Flows. In addition, an audit of cash balances

and other liquid assets will be done in order to determine whether or not cash and liquid assets


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received in 2010 was properly recorded and that all cash disbursements in 2010 were properly

authorized and documented.

Topic DERP and First Phone

During 2010 two new technologies ERP and First Phone was implemented as part of Home

Depots ongoing strategy to invest and improve business operations. This device provides the in-

store associates the capability to assist in a more efficient manner where it provides them with a

computer, phones, walkie-talkies, and also a portable register. It also allows an associate in a

different department to radio over to another associate in a different department if they have

questions or needs help in that department. Overall, the First Phone puts the customer first.

Since the new First Phone technology needs to be fully tested to ensure its efficiency, we will

evaluate how has improved and simplified customer service activities. Our review will also

assess First Phone capabilities to provide analytical data on customer behavior, processing

integrity, security, and access point to the information technology infrastructure. Our evaluation

will help to assure operations management and Matt Carey, Chief Information Officer that data

captured using the device can be relied on to provide reliable information for operating and

financial decision making.

ERP was implemented to transform the supply chain process. Our review and

recommendations will report on how effectively the ERP system have enhanced inventory

management, reduced cost related to merchandising activities, and improved the overall

efficiency of network distribution to date.


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PLANNING PHASE

The approach for the execution of the Home Depot audit engagement will consist of

interviews with employees and management, reviewing documents, reviewing financial

statements, inspection of facilities, and the use of the companys equipment. A planning phase

work program has been created. The items included in the planned work program are derived

from agreed upon topics for review.

Below is the planning phase work program for Home Depot:

A. Management & Organizational Chart

Analyze Home Depots organizational chart. Review chart for overlapping

positions that should be divided for segregation of duties, or if positions are

redundant/necessary as part of the organization structure.

Interview selected number of management (upper, middle, and lower) andemployees to understand the cultural environment, relationships across departmental

lines, their individual understanding of organizations goals and objectives, and what they

consider to be their main priority when it comes to meeting these goals and objectives.

Interview the board to enquire about leadership styles, communications with staff,future expectations, about how the company functions, knowledge of ethical and integrity

issues (past and current).

Observe employees interacting with management (intimidating or open approach)and inquire about job satisfaction levels.

Inquire about the board, audit committee, and management understanding of theimportance of internal control as required by SOX. Review and observe policies and

procedures adapted to satisfy internal control requirements.


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B. Human Resources/ Payroll Review HR functional responsibility to see if they are performing functions other

than authorizing of employees, pay rates and deductions.

Interview Supervisors to vouch if they authorize and approve work performed byemployees.

Gather and review a sample of employees time cards to verify that employeeswere present and working, and to detect if employees are punching time cards on behalf

of their absent coworkers, or ghost employees.

Review the Payroll functional responsibility to see if they are performingfunctions other than calculating pay only and not authorizing transactions or handling

custody of paychecks.

Review the disbursement function to verify that they are in no way authorizing,preparing, or journalizing transactions. Observations of the disbursement of paycheck

will also reveal if Supervisors are distributing paycheck which is would be a control

weakness because they have an authorization function and should be allowed to also

distribute checks.

Observe how unclaimed paychecks are handled and secured. Inquire if management keeps a separate payroll account, if so, review theaccount(s) and plan to reconcile the payroll account to verify there are no unusual

reconciling items.

Review the employees files for new hires and terminated employees and test thecontrols surrounding the input of this information into the system.


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Review the approval process for updating policies and how often these policiesare updated and presented to the Board of Directors.

C. Financial Statement Analysis and Testing Of The Cash BalancesAnalysis of Financial Statements

Gather and review the current year ending financial statements. Review current year ending balance as it relates to last years financialstatements.

Compare beginning and ending balances. Investigate unusual orsignificant change in all accounts.

Set a threshold for variances to determine which accounts will be furtherinvestigated.

Explain any trends that are seen throughout the financial statements. Compare financial ratios for 2009 and 2010.

Review external factors affecting the business (economy, competition, regulation,and accounting practices).

Review internal factors affecting the business (change in ownership, significantchanges in operating revenue, expense or debt, restructuring, new lines, products, or

activities).

Review notes in the financial statements to see if any unusual transactions aredisclosed. See if anything was done differently in 2010 than in 2009 that may cause

concerns.

Highlight and address unusual activities during the fiscal year.


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Testing of Cash Balances and Liquid Assets

Obtain and understanding of Home Depots cash management system and thebusiness purpose of the practices involved and identify business risks affecting cash and

liquid assets.

Prepare a listing of bank accounts, investments, and debt by financial institution. Determine the relationship of cash in the bank to the various transaction cycles. Design and perform audit tests of the general cash account and liquid assetaccounts.

Test the year-end balance of the general Cash Account and liquid asset accounts.

D. First Phone/ ERP Inventory SystemFirst Phone

Inquire how employees and management use the First Phone in the department. Inquire from customers how the First Phone has improved their shopping experience at

Home Depot.

Test the system controls as they relate to the First Phone device to ensure it is operatingon a secure software system.

Access reports that are generated from the First Phone device to do an analysis as to ifthere have been an improvement in customer satisfaction since the implementation of the

First Phone.

Observe the in store work areas at the Home Depot Stores analyzing the layout of thestore.

Make sure the store layout is both accessible for employees andcustomers.


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Observe if there is enough space for the store inventory to be displayedand kept.

Observe store layout out to make sure it is safe for the customers.Inventory Operations and ERP System

Determine the impact of the current Enterprise Resource Planning (ERP) system. Become familiarize with the ERP System.

Review ERP functions to determine whether the ERP systems have greateraccuracy in the costing of inventories.

Is the current ERP system parallel with the cost of sales and revenue

generated?

Does the current ERP system effect change on the merchandise inventoriesand retained earnings.

Gantt Chart - See attached budgeted hours


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WORK PROGRAM PHASE

A. Management & Organizational Chart Obtain or prepare an up-to-date organization chart with description of each workfunction.

Interview personnel and associated supervisors from each department to verifyjob descriptions and duties to determine necessities of responsibilities. Also inquire of

employees how they feel about Home Depots cultural environment and what their

expectations are.

Observe employees doing their assigned work function. A flowchart should also be obtained or prepared to understand arrangements andprocesses concerning: Policies, procedures, standards, and rules, relevant to the different

functioning department.

Do a comparison of the companys practices with other similar organizations todetermine efficiency of processes. Is the company considered a leader in its industry?

Select and evaluate key practices to verify that they are consistent with proceduresand rules.

Prepare a questionnaire to evaluate internal controlsB. Human Resources/Payroll Function

Interview the HR hiring managers to gain an understanding of the interviewprocess that is followed and the hiring procedures that are followed.

Review the employee manual that is given to the employee at the time they arehired to make sure there are policies on vacation, sick time, and covers other employment

issues that can arise.


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Review a random sample of employee files to make sure the employee and theHR departments complete the hiring paperwork.

Test a random sample of new employees and payroll to make sure what theemployee is being paid agrees with what is in their employee file. The auditor will also

review deductions to make sure they are properly set up based on the paperwork in the

employee file.

Review a random sample of employees that have terminated their employment toreview the time of employment.

Review the employee file and any access the employee had to assure they havebeen terminated from the system and payroll.

Obtain or prepare an up-to-date payroll information chart for easy visualization ofthe payroll process and controls.

Inspect a sample of timecards, which should have employees name anddepartment number and supervisors approval for each workweek.

Review overtime work policies by the respective department. Look to see ifappropriate approval is given by the department supervisors/head and that the payroll

department as part of the internal control process is reviewing the overtime for proper

authorization as well as reasonableness.

C. Financial Statement Analysis and Testing of The Cash Balance & Liquid AssetsFinancial Statement Analysis

Review 2010 consolidated financial statements this includes the balance sheet,income statement and statement of cash flows for fiscal 2009 and 2010.


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Perform trend analysis to by comparing 2010 financial statements and the 2009financial statements to see what areas have changed. Determine if sales are trending up,

costs are trending down, profits are trending up, and if cash flow is improving.

Review ending balances detail on 2010 financial statements and compare with2009. Look for unusual or significant changes in all the accounts and investigate. Set

threshold at 10% for variances in the 2009 and 2010 ending balances.

Compute the common financial ratios for 2009 and 2010. Look for significantchanges between 2009 and 2010. Ratios should include: cash ratio, quick ratio, current

ratio, accounts receivable turnover, inventory turnover, debt to equity, earnings per share,

profit margin, return on assets and return on common equity.

Review notes in the financial statements to see if any unusual transactions aredisclosed. See if anything was done differently in 2010 than in 2009 that may cause

concerns. These concerns will need to be brought to the attention of the chairman of the

audit committee for further explanation.

Interview chairman of audit committee and obtain external factors affecting thebusiness (economy, competition, regulation, and accounting practices).

Interview chairman of the audit committee and obtain internal factors affectingthe business (change in ownership, significant changes in operating revenue, expense or

debt, restructuring, new lines, products, or activities).

Interview chairman of the audit committee and obtain information regarding anyunusual activities during the fiscal year.


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Preliminary review of the balance sheet indicates a huge drop in the cash balance.Investigate the reasoning for the cash balance decline by reviewing and assessing the

2010 statement of cash flows.

Compare ratio of available cash to cash invested. Compare 2009 and 2010 ratioand determine if there were any significant changes.

Look for changes in working capital and debt balances. Compare these changeswith the change in the cash balance. Note any significant changes.

Interview with cash management to obtain assurance that all cash management

activities were for reasonable business purposes and were properly recorded. Identify

any potential risks.

Interview with cash management to determine if there is compliance of treasuryactivities with company policies.

Confirm bank balances of cash accounts by requesting confirmation of bankbalances as of January 30, 2011.

Obtain copy of the bank reconciliation and check for accuracy. Confirm that the cutoff bank statement is aligned with the bank reconciliation.Identify any differences. Inspect deposits in transit, outstanding checks and any other

items that may affect the reconciliation and the bank statement.

Obtain listing of bank accounts, investments and debt by financial institution.Compare the balances in these accounts by requesting confirmations from respective

third parties. Verify that these amounts are properly classified. Look for any factors

that may be susceptible to fraud.


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Determine the Boards role in regards to marketable securities by interviewing theBoard. Obtain supporting documentation from the Board regarding the following:

approval of investment policy and risk assessments; Boards resolutions on major

investments and changes in investment policies; and the Boards review of

marketable security investments and analysis of risks associated with the investments.

D. First Phone/ ERP Inventory SystemOperational ReportingFirst Phone & Third Party Vendors

In reviewing the First Phone the auditor will first interview managementfor the departments within the stores. The auditor will want to determine how the

First Phone is used within the department and will also want to have management

provide them with a step-by-step walkthrough of using the device.

The auditor will then perform a test in the different departments and pull arandom sample of employees that use to First Phone and assure that the

employees are using the First Phone based on the interviews that were conducted

as to how the device is used in the departments.

The auditor will want to review reports pertaining to inventory to assure itis kept in stock and the First Phone is meeting the requirement of keeping

inventory in stock.

The auditor will pull reports for the past five years for review. A reviewwill be conducted of these reports to make sure inventory is properly stocked and

accounted for. An interview of management in the departments that handles

inventory will be conducted to make sure the reports are being utilized. An


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examination will also be conducted to make sure the inventory process is being

properly handled and not impacting other job duties.

The auditor will also review reports of the First Phone being used forcheck out purposes to make sure it is properly checking out customers.

The auditor will review the analytic reports for the following details: i)Review if the First Phone is meeting the customers needs. ii) Interview

customers to determine if the First Phone is meeting the expectations of

customers needs. iii) Review the customer satisfaction percentage to see if it is at

85% or higher based on the usage of the First Phone

A random sample of First Phones will be pulled and test for securitypurposes. The examination will review the process of signing onto the device to

make sure it secure. There will also be a review of the time that that a device

locks once it is not in use. The checkout process will also be examined to make

sure there are secure terms that are used for checking out the customer.

Contractual agreements will be obtained from the corporate offices for theFirst Phone devices other third party vendors that work with Home Depot. These

contracts will be reviewed to make sure there is a privacy agreement, both parties

agreed to the terms, that the contract is still in effect, and that there is an

agreement to maintain security over the information that is maintained on these

devices.

The laws and regulations that Home Depot falls under as a corporationwill also be examined to assure the company is functioning under these laws and


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regulations. The third party vendors will also be reviewed to assure that they are

within these laws and regulations as they pertain to the third party vendors.

Inventory Operations and ERP System

Collect operational inventory reports from management and associateddepartments.

Are reports being utilized by management and employees. Is report information adequate for the everyday work environment? Interview personnel directly involved in developing and distributing operationalreports.

Collect financial reports directly related to inventory operations. Are reports cohesive with the operational environment? What is the financial budget allotted to inventory management? Is the financial budget in accordance with actual conditions? Identify the fluctuations in the financial budget. Are budget fluctuations sound and justifiable? Identify budget-reporting procedures. Is the budget reporting procedures effective? Interview personnel directly involved in developing inventory budgets. Review current inventory facility layout and conditions. Is the facility layout conducive to an effective work environment? Interview company personnel concerning effectiveness of the facility layout. Identify major and minor equipment used in day-to day operations. Analyze the impact of equipment on operations.


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Is equipment managed properly?Facilities and Equipment

The auditor will observe each department to make sure it properly stockedwith inventory and that items are accessible for the customer.

The auditor will review how the inventory is stocked to assure it is visiblefor the customers and the prices are properly labeled for each item.

The auditors will review the department to make sure it is safe and thatitems that could be of danger are properly stored in the department for the

customers safety.

The auditor will review the safety manual to assure it is update to date andthat the manual is being followed within each department

FIELD WORK PHASE

A. Management & Organizational Chart

Each store is divided into 15 departments with employees working in teams to provideservices to customers. The departments includes appliances, bath & faucets, building

materials, dcor, doors & windows, electrical, flooring, kitchen, lightening & ceiling

fans, lumbering & composites, outdoors, paints, plumbing, storage & organization, and

tools & hardware. The respective departments have individual supervisors to monitor and

divide work load among team members.

Observed employees performing duties. Time management needs improvement becausesome department were short staffed when supervisor allowed more than one worker to

leave for lunch at the same time, leaving customers unattended.


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Compared to competitor Lowes, Home Depot customer service needs improvement asobservations revealed that some employees are unwilling to work beyond the scope of

their job description, which gives the perception of being less willing to offer assistance

to customers. Some employees did not seem to know the product lines or how to check

the inventory count, which can be corrected with training.

Interviewing sample of employees from each department revealed that workers aregenerally satisfied with their job and working conditions. The atmospheres in the stores

are open and friendly which is a direct reflection of the corporate culture.

The job functions and responsibilities for employees, supervisors and management werereviewed. Employees understand what their responsibilities are and who to reach out to

for assistance in completing job functions.

Interviewed management to identify control activities, policies and procedures insafeguarding assets from unauthorized personnel. Verified that the separation of

functions of authorization, asset custody, and records were followed to minimize

opportunities for persons to perpetrate fraud in the normal course of his/her duties.


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(Figure A: Prepared by Rose Forde)


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B. Human Resources Performed analytical procedures to compare payroll current expense with expectations

from prior years. Compared payroll budgets against actual results for current year.

Recalculated the payroll expense using the total hours worked to approximate estimate of

payroll expense. Compared clients labor ratio to companies within the same industry.

Reconciled payroll tax expenses with payroll tax returns. Amounts were properly

recorded.

Inquired of management if about contractual agreements, union contracts, pensions, otherpost-employment benefits agreements. Management provided documentations, which

were reviewed to confirmed amounts and disclosure. Recalculated pension and other

post-employment benefits cost to determined that the amounts were properly recorded

and funded based on the agreements. Amounts were properly recorded and disclosed.

Reviewed time cards for proper hours and approvals and compared with payroll summaryreport. Recalculate sample of employees gross pay, deductions and net pay based on

time cards, pay rate, and withholdings. Reconciled payroll bank accounts and confirmed

with manager that this is being done on a monthly basis.

Observed the distribution of paychecks to confirm that legitimate employees only arebeing paid. Inspected a sample of cancelled checks that was paid out to employees,

government agencies and other related payroll expenses to validate that the monies was

for bona fide payroll expenses.

Another test to vouch for bona fide payroll payments was reviewing sample employeeexpenses with supporting documentation such as approved time cards, and pay rate noted


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in personnel records to validate that employees worked the number of hours for which

they were paid.

Reviewed current list of employees, authorizing hires, promotions, and terminations.Verified staffing by interviewing supervisors and actual workers to uncover ghost

employees or employees who had resigned and not promptly deleted from the payroll

files. Human Resources have properly maintained employees listing and records.

Review payroll entries and accruals to correct account distributions (FICA, WorkersCompensation, State and Federal Unemployment, payroll taxes payable, accrued payroll

etc.) Entries were properly recorded.

Through the review of employees that work at Home Depot and the turnover ofemployees the following findings were found:

With nearly 2,100 stores in the United States, Mexico and Canada and new storescontinuing to open, Home Depots working more than 350,000 associates grows

substantially (Home Depot Executive, 2012).

Once an employee begins employment at Home Depot there is not a high percentage ofemployees that leave the company.

At time that Home Depot is placing employees in leadership positions, about 80 percentof those are internal promotions (Home Depot, Executive, 2012).

Our findings indicate that there are, loyal older people and a low turnover rate byretailing standards (Freudenheim, 2005).


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A sample of 30 files was tested for new hires at Home Depot. A review of the files showed that all 30 employees completed all required new

hire documentation and was kept in the employee file.

The test work also showed that the employees were entered into the systemproperly with the employee set up properly.

The test work also showed that the employees were set up properly into thepayroll system.

The set-up of new employees in the payroll was tested for dual review and therewere two signatures of one employee entering the new employee information into

payroll and another employee reviewing the set up.

A sample of 30 terminated employees was tested for employees that no longer work at HomeDepot.

The test work showed that the employees returned all required equipment to thehuman resource department upon their last day of employment.

The test worked showed that out of 30 employees that were terminated there were 2employees that had not yet been removed from the system.

The audit team reviewed Home Depots policy in regards to the independence of the auditors,by-laws, and corporate governance. See formal code of conduct.


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Code of Conduct

Our values reflect the beliefs, principles and standards that form the groundwork of our

behavior and should be drawn on when making decisions. We believe in Excellent Customer

Service, Building Strong Relationships, Entrepreneurial Spirit, Respect for All People, Creating

Shareholder Value, Doing the Right Thing, Giving Back and Taking Care of Our People.

This Business Code of Conduct and Ethics (the Code) is intended to provide you

straightforward information about The Home Depots operating principles and offer tools to help

you make decisions that align with our ethical expectations and legal obligations. All associates

are expected to act with honesty and integrity. Adhering to the highest ethical standards and

doing the right thing are the driving forces behind The Home Depots success and have been a

core component of how we have done business since the beginning.

This Code applies worldwide to all associates of The Home Depot, inclusive of Home

Depot controlled subsidiaries as well as all members of the Board of Directors. This Code is

designed to provide a broad overview and scenarios on how to conduct Company business in a


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manner consistent with our core values. As it cannot cover every potential scenario you may

encounter, remember that in most situations your own good judgment is the best gauge when

facing a potential ethical issue.

The review of these documents provided auditors with an understanding of thepolicies and procedures that are implemented by Home Depot.

These policies need to be updated on a yearly basis and reviewed at the annualmeeting that is held by the Board of Directors.

C. Financial Statement Analysis and Audit of Cash BalancesFinancial Statement Analysis

The 2010 Consolidated statements have been reviewed. Financial Ratios have been computed for 2010. See results on excel spreadsheet. Trend analysis comparing fiscal 2010 balances on financial statements to fiscal 2009

balances was conducted. See overall results and findings on excel spreadsheet.

Notes to the consolidated financial statements have been reviewed.Recap of Findings from Trend Analysis

Net SalesSales increased 2.8% in 2010. Gross MarginMargins increased 4% in 2010. Operating ExpensesExpenses decreased 0.8%. Net EarningsEarnings increased 27.4%. CashCash decreased 62%. Total AssetsAssets decreased 1.8%. Total LiabilitiesLiabilities decreased 1.2% Total Stockholders Equity Equity decreased 2.6%


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Notable Findings of Significant Changes Of Consolidated Financial Statements

Cash From Operating Activities $4.6 billion in 2010 compared to $5.1 billion in 2009.Decrease in cash due to a change in the inventory levels and working capital being offset by

increased earnings.

Cash From Investing Activities - $1.0 billion in 2010 compared to $755 million in 2009.Change due to increase Capital expenditures and low proceeds from sales of property and

equipment. Determine the amount of capital expenditures spent in 2010.

Cash From Financing Activities $4.5 billion in 2010 compared to $3.5 billion in 2009.Change due to repurchase of common stock totaling $2.4 billion and $1.6 billion in cash

dividends paid to stockholders. This offset by a $998 million increase in proceeds from long

term borrowing in addition to a $745 million decrease in repayments of long term debt.

Notes Receivable - $139 million in 2010 compared to $33 million in 2009. Treasury Stock - $3.2 billion compared to $585 million in 2009. Home Depot made a huge

purchase of its own common stock in 2010.

Notable Findings on the Notes to the Consolidated Financial Statements

Rationalization Charges In 2008, Home Depot reduced its store expansion and closedunderperforming stores. Instead it focused on improving its existing stores. The company

invested in the existing stores in order to continue customer experience. The company

completed the Rationalization in 2010. There were no charges incurred in 2010.

Change in Accounting Principle In conjunction to the new ERP inventory system thatwas introduced, Home Depot changes its inventory method from lower of cost or market

using FIFO to lower of cost or market using weighted average cost method. Neither of these

notable findings is deemed necessary to present to the chairman of the audit committee for

further investigation.


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Review of the Balance sheet and Statement of Cash Flows is complete. Findings areindicated above under Item# 4. Cash Ratio was calculated. See excel spreadsheet for

calculation and explanation.

In reviewing the financial statements, there were no significant changes in the workingcapital and debt balances. These changes did not affect the cash disbursements for 2010.

An interview was conducted on Wednesday November 28, 2012 with Dwaine Kimmettwho serves at the Treasurer of Home Depot and also the Vice President of Financial

Services. During the interview, provided assurance that all even though there was an

increase in cash disbursements in 2010, all the cash disbursements activities were for

reasonable business purposes and were properly recorded. He confirmed that a major of

the cash disbursement in 2010 were due to cash dividend payouts, payment of long-term

debt, and also repurchase of common stock. In conclusion, he indicated that all treasury

activities performed in 2010 were in compliance and overall there were no signs of

possible risk in regards to cash management and distribution.

Interview was conducted on Thursday November 29, 2012 with Bonnie Hill - who hasserved on Home Depots Board of Directors since 1999. The purpose of the interview

was to determine the Boards role in regards to marketable securities, its policies, and any

risks factors that needs to be addressed. Ms. Hill mentioned that Home Depot has not

had any stake in marketable securities since 2008. She also indicated that the company is

currently not interested in purchasing any type of marketable securities or any other type

of investment in the near feature and that its primary investment currently is Home Depot

and its customer base.


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A copy of the bank reconciliation as of January 30, 2011 was received from the Treasurydepartment on Wednesday. Preliminary findings indicate that the reconciliation is

mathematically accurate. The balance as of January 30, 2011 is $5,493,000.

The balance of $5,493,000 was traced back to the bank confirmations received fromWells Fargo and Bank Of Americaboth received on Thursday November 29, 2012 and

Friday November 30, 2012. The total balances do match.

The bank statements as of January 30, 2011 were received from Wells Fargo and Bank ofAmerica and it is aligned with the bank reconciliation adjustments were made for

deposits in transit and outstanding checks and service fees.

Listing of debt was received on Friday November 23, 2012 from Wells Fargo and Bankof America. These balances were compared to the confirmations of debt balances

received on Wednesday November 28, 2012. In reviewing the general ledger accounts,

the balances are properly classified. During the review, there were no indications of

factors that may be subject to possible fraud.

Statement released from the company:

The Home Depot strives to be the employer, retailer, investment, and neighbor of choice

in the home improvement industry. Corporate governance is part of our culture and is founded on

our daily commitment to living values and principles that recognize our ethical obligations to our

shareholders, associates (employees), customers, suppliers, and the communities in which we

operate. We understand our responsibility to behave ethically, to understand the impact we have

on people and communities and to fairly consider the interests of a broad base of constituencies.

With this being said, we stand by all of our financial practices and statements. All information

provided in our annual reports is derived from Managements Responsibility for Financial


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Statements and Managements Report on Internal Control Over Financial Reporting; and Reports

of Independent Registered Public Accounting Firm and consolidated financial statements for the

corresponding fiscal year. Finally, any information pertaining to Home Depot including all

financial reports, filings with Securities and Exchange Commission, news releases are available

at our Investor Relations website Corporateir.net.

D. ERP and First PhoneERPoperational inventory reports from management and associated departments

Two weeks prior to the inventory operations department visit, Susan Gray, vice president ofinventory systems was contacted via letter. The letter asked for copies of most recent inventory

reports for the past two years, including: 1. Inventory reports for the system currently in use, 2.

Inventory reports for the ERP systems in use, 3. Financial reports directly related to inventory

management, 4. Reports related to facility structure and housing of inventory, and 5. Any other

pertinent documentation directly related to inventory management.

It was requested several times that her or a direct colleague within the department beavailable for a brief 20-minute interview. The letter highlighted the scope of the interview

and noted that there will be a focus on the new ERP Inventory system. In addition, it was

requested the Group A audit staff have access to tour company facilities where much of

the companys inventory is housed and also have the liberty to ask associates

informational questions relating to inventory management.

Correspondence was immediately received within three days from Susan Grays secretarythat the reports would be electronic and available on a portable hard drive in the

secretarys office and the earliest interview would have to be with AW Steel, the

Inventory Management Director, and the person spearheading the ERP transition.


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The auditors were granted access to tour the inventory facilities at any time between nowand the conclusion of the audit. It was requested that all questions be e-mailed to Susan

Grays secretary and approved by Susan prior to the auditors contact with the associates.

Are reports being utilized by management and employees? Is the report information adequate forthe everyday work environment? All inventory information requested was provided. The

information was very extensive. It entailed inventory information for all stores across the

U.S. and Canada. The audit team focused and pulled samples of inventory reports from

the U.S. Southeastern Region and all ten providences of Canada. The U.S. Southeast was

selected because the company was founded in the South, and many operations that are

implemented in all stores are normally developed in this region. Canada was chosen

because the ERP inventory system was first introduced in the providences of Canada in

2008.

Of the 420 stores in the southern region, a 15% sample of 60 stores was selected. Thesestores were selected at random and included the highest gross profiting and second least

gross profiting store in the region. Of the 200 stores in Canada, a 20% sample of 40

stores was selected.

Interviews Conducted A: personnel directly involved in developing and distributing

operational reports.

Two days after submitting the questions to the inventory management, a response wasreceived. Four of the eight questions submitted for approval to Susan Gray were

approved. No specific explanation was given as to why the remaining questions were not

approved, besides a general statement given by Gray, The Companys inventory

reporting is very accurate, and all the information your audit team needs to successfully


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complete the audit should be in the documents provided. It was determined that the

questions not approved would not hinder the audit, so we proceeded with the questions

approved.

The interview with inventory director AW Steel was postponed due to reasons unknownand would have to be rescheduled for a later date. Fortunately, information uncovered in

the samples was very detailed and illustrative concerning the ERP system.

The ERP system utilized the weighted average cost (WAC) method of accounting. Inmany of the stores in the U.S. the first-in-first-out (FIFO) method of accounting is

utilized. Of the 15% sample of stores in the Southern region, 88% or 53 of the 60 stores

use the FIFO method. This method has been in existence since these individual stores

were opened. The 7 remaining stores in the sample that utilize the WAC method are

amongst the top 4 gross profiting stores in the sample. The 3rd and 4th top gross profiting

stores in the region use the WAC method while the 1st gross profiting store in the region

continues to utilize the FIFO method.

Of the 20% sample of stores selected in Canada, 100% of the stores use the WAC methodof inventory accounting. The gross profits of these stores were very stable and somewhat

alike. The WAC method of accounting has been used since 2008 and has been well

received. Major conflicts or fluctuations related to inventory are not present.

The information provided to the audit team was very detailed and extensive and gave theaudit team a great platform to work with. To be sure proper due diligence is in place, the

audit team conducted interviews with company employees directly involved with

inventory reporting at the corporate office in Atlanta Ga. and with associates at two stores

selected in the Southeast audit sample.


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All interviews with company associates were limited to the 4 questions that wereapproved by Susan Gray earlier in the audit process. Because the interview with

inventory director AW Steel was currently on hold, the audit team was granted an

interview with the head of Steels inventory management team, Ray Parker-Noble.

The interview was quite free flowing and informative. All the information Parker-Nobleshared with the audit team corresponds closely with what was found in the inventory

reports. Parker-Noble explained that because of the new ERP system, the company has

tightened controls of inventory. Floor associates in the stores and warehouses must

provide store inventory reports at the end of each month. The sample of error in these

reports cannot be greater than 7- % of what the corporate office has recorded for that

store. If the sample of error is a growing concern, members of AW Steels inventory

management team are dispatched to that store for further review. This year, of the 420

stores in the Southeast region, 9% or roughly 38 have had to undergo further review.

Parker-Noble works closely with the inventory manager of the Canada stores, Ian Early.He stated that the ERP system adopted in Canada has proven successful. Inventory cost is

better maintained and gross profit projections are a lot more reasonable based on market

trends using the WAC method compare to FIFO.

Interview Conducted B: Chairman of Audit Committee- F. Duane Ackerman

Director Ackerman was kind enough to give a quick interview to our auditor. Below are

highlights of the conversation that transpired on a recent November day:

When asked about the makeup of audit committee for Home Depot:


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He responded with saying that the committee was made up of five members that were

independent from the company. Besides himself, the members include Ari Bousbib, J. Frank

Brown, Karen L. Katen and Mark Vandon. Each member brings to the table years vast industry

knowledge, including corporate strategy, expertise in financial/accounting matters, supply chain,

and information technology, which helps guide the company to a successful future.

When asked about the purpose of the audit committee:

He quickly stated that the audit committee had several purposes. Those purposes

included assisting the Board of Directors in fulfilling its oversight of the integrity of the

Company's financial statements, the Company's compliance with legal and regulatory

requirements, the Company's independent auditors' qualifications and independence, and the

performance of the Company's internal audit function and independent auditors.

When asked about external factors affecting Home Depot:

He responded very candidly stating that unfortunately the home improvement industry is

direct impacted with the current state of the housing market. As recent years have shown, the

housing market is not what it used to be. New homes arent being built and consumers are

putting off expensive renovations and are opting for repairs and smaller remolding projects

instead. The upside of the situation is that the U.S. economy is starting to slowly recover.

Due to the current market conditions, the company had to adapt in order to remain

profitable; this includes cutting the fat in certain areas. The company has closed 15

underperforming stores, closure of 34 EXPO Design Center stores, five Yard BIRDS stores, two

Design Center stores and a bath remodeling business known as HD Bath. Furthermore, Home

Depot is known for opening 100,000 square feet big box stores.


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This will also change as the company looks into opportunities to open smaller stores,

which require lower construction costs. In a situation where the sales environment cant be

controlled and predicted, all of these changes help lower the companys expenses while still

performing and posting profitable numbers.

When asked about internal pressures affecting Home Depot:

Director Ackerman was quick to state that maintaining the cost saving measures that

were enacted in recent years was a main issue. These measures helped save the overall company

and overall market share from our competitors such as Lowes. When the economy is in

upheaval, most companies quickly turn cutting costs by cutting labor force.

Home Depot was no exception to this theory; however the cuts started at the top. The

company reduced corporate support staff, which impacted roughly 2,000 employees and resulted

in a 10% reduction in the companys officer ranks. With HD operating over 2,200 stores with a

total of 300,000 employees worldwide, the labor force cut was very minuscule in size.

Additional steps taken include salary freeze for all officers. The company will still offer

merit increases to entry-level staff, earned promotion bonuses and existing 401k matching for all.

Surprisingly, he said changes even on small things can add up and help the company. One

example of this would be changing the brand of coffee offered to associates saved the company a

remarkable $500,000.

When asked about HDs future goals and plans to remain atop of the industry and a

profitable business?

For the first time in the entire interview, Director Ackerman leaned forward excitedly and

quickly responded what the company has been doing. He was quoted, The numbers dont lie

and HDs is continuously growing. Earlier this year, we reported earnings of $774 million. That


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number alone is up from $587 million at the exact time last year. The companys quarterly

revenue increased 6% to $16.01 billion from $15.13 billion, beating Wall Street's $15.5 billion

estimate. In a nutshell, we are doing better than industry standards, Wall Street or analyst

predictions, and our own forecasting. The numbers are based off a successful cost savings

measure and a refocus on our core retail business, investing in associates and stores and

improving upon customer service. These initiatives have been put in place to ensure the

company continues to strive.

We would like to thank Director Ackerman for taking time out of his busy schedule and

answering these questions.

First Phone

(Photo by Rose Forde)


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Reviewed reports as to the ratings and how Home Depot has improved with the

implementation of First Phone:

The First Phone was rollout in 2010 and since this rollout Home Depot has experiencedas surge in Net Promoter Scores (Fiorletta, 2012).

The First Phone was such a success that Home Depot has made the decision to implementa new model of the First Phone. Home Depot is adopting a model of the EWP devices

from Motorola and branding them as First Phone Juniors (Fiorletta, 2012).

The success of the implementation of the First Phone was indicated in review of thepayroll and the allocation. For the first-time, more than half (51%) of the retailers store

payroll is allocated to customer-facing activity rather than tasking activity (RIS, 2011).

Home Depot has provided its employees with a new device- the First Phone that is a

powerful tool for them. It is a multi-use technology that enables people to check stocks and

answer customers questions.

The First Phone is a combination of inventory management, analytic functions, and VOIPtelephone, a store walkie-talkie, and label printing with POS.

The First Phone in Home Depot allowed the sales associates to bring the customersservice. The device is based on Motorola MC 75 platform, which is operated applications

and communication device.

The First Phone speeds up the checkout, which significantly helps with the customers,turn over.

The device looks like a smart phone with full keyboard and 4 inch screen. Employeeshave to use stylus to make a selection on the display and can hook up printer or card


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scanner to it. This helps with faster printing out labels from the aisles and to check out

customers. The First Phone can also be used as a laser scanner.

The IT department of Home Depot has built out an application framework by using .NETCompact Framework, using the devices WLAN capability to communicate with its

stores services via Web services.

The company uses third party Voice over IP-based phone to the handle devices work asanother phone.

Security

On site audit work was conducted to test the security of the First Phone device that is

used by multiple employees. The following steps where followed to test the security of the

device:

Test: A sample of 20 employees was randomly test to assure that they all had different

passwords to log on to the device. It was also tested to assure the First Phone requested a

password every time to log on.

The test showed that all 20 employees did have passwords to sign onto the device. The test work showed that that the device did not always ask for a password to log onto

the device.

The device is not active if it is being used outside of the Home Depot Store. The deviceautomatically locks after 10 minutes of not being used. If it is within a specific radius of

outside the store it will not activate to turn back on.

The device also has different levels of access that is granted and set up for eachemployee. A sample of 20 employees was selected randomly to review this.


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Of the 20 employees tested management had different access on the device than theemployees did.

The testing also included using the access sheet that is filled out by a manager and givento IT to set up the employees access. This indicates that employees did have some access

to system programs that they should not have been granted.

The First Phone is a combination of inventory management, analytic functions, and VOIPtelephone, a store walkie-talkie, and label printing with POS.

The First Phone in Home Depot allowed the sales associates to bring the customersservice. The device is based on Motorola MC 75 platform, which is operated applications

and communication device.

The IT department of Home Depot has built out an application framework by using .NETCompact Framework, using the devices WLAN capability to communicate with its

stores services via Web services.

The company uses third party Voice over IP-based phone to the handle devices work as

another phone.

The stores of Home Depot interact in between each other by using the POS systemapplication access by mobile WEB browser.

Management Viewpoint on First Phone Device:

An interview was conducted with management to gain an understanding of how the First

Phone is used in day to day business operations at Home Depot and the following questions were

asked:

Q: How many employees are equipped with the first phone device?


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A: The management stated that there are at least 3 employees in each department that use the

First Phone and one of them will always be the manager.

Q: Since Home Depot has been using the First Phone have you seen it improve the employees

ability to answer the customers question or get them to the right department?

A: Management responded that the employees response time has improved since the First Phone

was implemented. They have noticed employees communicating more with employees in other

departments and learning more about products, which is providing them with the necessary

knowledge to answer customers questions.

Q: Other than using the device as a walkie-talkie to communicate to other employees in other

departments how is the device used and increasing business at Home Depot?

A: Management responded that the device also provides updates to the employees when an item

is low on stock and needs to be restocked, which has provided a good tracking system for

inventory. It also has the capabilities to provide customer with easy check out.

Q: Do you see employees using these devices for personal use?

A: Management explained that the devices are only for employees to use for Home Depot

business. Employees keep to this standard and are not making outside calls our using the

Internet for personal use. If employees are not helping customers then they are stocking low

inventory or providing check out services to customers. Since the implementation of First Phone

it has added tasks to the workflow that employees do on a daily basis.

After the interview with management was conducted a walkthrough with an employee

was conducted to see the First Phone being used on the floor to assist customers. The employee

first demonstrated how the device is used to get in touch with an employee from another

department. It is just like a walkie-talkie. The employee radioed over to the necessary


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department and that department responded. The employee then showed us how the device

provides notification that an item is low on stock and it needs to be re-stocked. The employee

also walked us through how the device is used to checkout a customer.

Customer Viewpoint on First Phone Device

Interviews were conducted with a customers to get their response as to if the device has

meet their needs and their responses were as follows:

Q: Since the implementation of First Phone have you noticed an increase in the response time

from employees?

A: The customer responded that employees have access to other departments in a timely manner

and they are able to answer questions rather than just directing us to other departments like they

did before the First Phone.

Q: Are you satisfied with the customer service that you are provided while shopping at Home

Depot?

A: The customer responded that it is a much more organized shopping experience. Also, if there

is a long wait time to check out the device provides customer with the ability to check out and

decreases the wait time to check out.

REVIEW AND FINDINGS PHASE

A. Organization Structure

Audit Findings: Based on work performed during the fieldwork phase these are the following

findings relating to Home Depots operational audit of organizational structure.

We have found that Home Depots corporate structure is not overly complex and becauseof the size of its operations it is in line with other companies in the same industry. The

turnover rates for key positions are low, signifying the stability of management, which is


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reflected in the policies governing hiring and retaining qualified and competent

executives to operate the business.

Review of Home Depots organizational chart and job description revealed that there isproper segregation of duties in the key function areas of and job functions is as described.

Our observation and interviewing of employees revealed that Home Depots represents aconstructive culture, which is event in their diverse workforce. However, some

improvements are needed to increase employees satisfaction with their jobs and work

setting.

Our team observed that at the department level there are time management challenges,

where some department are understaffed at certain times during the day due to scheduling

problems.

Criteria: Relating to the Home Depots organizational structure

Home Depots management is responsible for setting the proper tone at the top thatemployees can model as a way of maintaining a culture of honesty.

Proper segregation of duties supports an organizational internal control by helping toprevent, detect, and deter errors and fraud. This includes authorization, record keeping,

and custody of assets. Segregation of duties helps to minimize the opportunities for

person(s) to perpetrate and conceal errors or fraud in performing his/her duties.

Employee job satisfaction can impact behavior and performance, because of theseemployees who have low job satisfaction tends to exhibit negative behavior such as

absenteeism and turnover.

Time management is important for operational efficiency.


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Cause: Absenteeism and turnover can be very costly to an organization when it is view in terms

of lost experience, recruiting, training, and replacement expenses and can impact corporate

earnings. Lack of time management can also erode the companys bottom line as this is linked to

customer satisfaction.

Effect: Management need to address these key areas of employee job satisfaction and time

management if they want to maintain both experience associates and improve customer

satisfaction.

Recommendations: Relating to the Home Depots organizational structure

Employees Trainingto increase efficiency, we recommend that management implement

ongoing training for employees. Our observation revealed that some variety of task

performed are limited in scope, and although assigned task is easy to master the

repetitiveness of some task can have the a negative effect of reducing motivation which

can also negatively spilled over to customer service, a key areas for this type of industry.

Maintain and build motivation - Management should considering designing jobs to makejobs more interesting. This can be done by extending the variety of task an individual

perform, for example having an individual perform more than one task with the

responsibility level remaining the same.

Management can also benefit from implementing job rotation, which allows the workersto become familiar with different tasks increasing flexibility where they can move from

one job to another seamlessly. This also have an indirect benefit of reducing fraud when

only one person is assigned to a task which no one else can perform.

Training and having multiple skills will also solve the problem observed that someemployees lacked knowledge of the product line and will increase their willingness to


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assist customer beyond their job description. This will increases productivity, work

attitudes, and faster turn around time in assisting customers. From incorporating these

suggestions, management can better evaluate employees who show ability and skills

warranting promotion and personal growth.

Time Management - to increase efficiency and address the workforce scheduling issues,we recommend that management encourage supervisors and managers to use technology

to assist them in keeping track of scheduling task such as time off, breaks, sick days,

personal days, etc. This will also help in assigning workers to cover areas if the need

arise preventing loss of productivity. This is an easy fix because the HR/Payroll

department to track employees expenses is already using computers and appropriate

softwares.

B. Human Resources/Payroll Functions

Human Resources

Audit Findings A: Through a review of the human resource department and the controls

associated with employee information the following are our findings:

There is not a strong control that is in place to review that terminated employees aretaken out of the system and their access is removed.

A sample of 30 employees was tested to make sure that they no longer had access toHome Depots software and they were removed from e-mail and other systems within

Home Depot.

There were 2 employees that after being terminated they still had access to the software,e-mail, and other systems within Home Depot.


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Criteria: Home Depot needs to make sure that all terminated employees are removed from the

system. Once an employee has terminated their employment their access to all Home Depots

systems should be terminated immediately.

Cause: During the audit it was found that there is not a checklist that is completed at the time

when employees access is being removed at time of termination. There is also is not a second

review that the employees access was not successfully terminated.

Effect: This could cause there to be fraudulent activity if the employee still has access to the

system. It could also lead to payroll fraud if the employee is still in the system.

Recommendations: Three recommendations have been made in regards to terminated

employees:

The Human resource department needs to implement a process so that there are morecontrols associated with the termination of employees. They need to identify employees

that will be responsible to take the employees out of the system and which employee will

review this.

A checklist needs to be developed that takes the employee that is assigned the task toremove the employees access the steps that they need to follow. It also needs to be

determined what access employees of Home Depot have to assure that nothing is missed

when this done.

At the time of termination employees must be required to meet with humane resourcesand turn in all required equipment that belongs to Home Depot. At the same time the

individual that is responsible to terminate access should be given the checklist to being

the process.


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Audit Findings B: Through a review of the policies and procedures that are followed by Home

Depot and their employees the following was our findings:

The policies and procedures are not reviewed and updated on an annual basis for anychanges or updates that are necessary.

The policies that are updated are not reviewed at the annual meeting for the Board ofDirectors. These policies should be reviewed and approved by the Board of Directors.

Through our audit fieldwork we found three policies and procedures that had not beenreviewed or updated since 2006.

Criteria: Home Depot needs to make sure that policies are updated and new policies are

developed on an annual basis. The Board of Directors also needs to provide their approval for

implementation of policies.

Cause: During the audit it was found that there were three policies that had not been updated

since 2006. It was also discovered that the Board of Directors does not review and approve

policies.

Effect: Home Depot needs policies and procedures in place to ensure that processes are properly

being followed. The Board of Directors needs to approve these policies so that they have an

understanding of the processes within the company.

Recommendations: Three recommendations have been made in regards to policies:

Management will be responsible to review policies within their departments to assure thatthey are updated when a new process or system is implemented.

On an annual basis management will meet with the executive team to provide the policiesthat have been updated for their review and to have them presented to the Board of

Directors.


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(Figure B: Payroll Flowchart Prepared by Rose FordeAdapted from CPAExcel.com)

C. Financial Statement Analysis and Audit of Cash Balance and Liquid Assets

Financial Statement Analysis

Audit Findings: Considering that the current renovation market has essential come to a

staggering halt and is slowly recovering, Home Depot still is doing continuously well. Even

with poor market conditions, the company has still been able to maintain profitable shares and

97th consecutive dividend payouts. We have found that Home Depot management has done an

outstanding job of cutting costs companywide where it has been necessary. Due to these

changes, in the first quarter alone net income rose 12% to $812 million. After assessing the 2010

combined financial statements and performing a trend and ratio analysis for Home Depot, our

overall review provides the following findings and recommendations:

Considering that the current renovation market has essential come to a staggering haltand is slowly recovering, Home Depot still is doing continuously well. Even with poor


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market conditions, the company has still been able to maintain profitable shares and 97th

consecutive dividend payouts. We have found that HD management has done an

outstanding job of cutting costs companywide where it has been necessary. Due to these

changes, in the first quarter alone net income rose 12% to $812 million. However to

ensure continuous profitability for years to come, we have some recommendations that

should be implemented.

After performing an analysis of the financial statements, there are notable areas thatindicate that Home Depot is moving in the right direction as far as sales operations and

net earnings. Net sales increased 2.8%; operating expenses decreased 0.8% and net

earnings increased 27.4%. At this time, there are no recommendations for improvement

in these two areas; however it is recommended that the company continue to find

innovative ways to increase its sales operations and net earnings.

The Cash Balance dropped dramatically by 62% in 2010. The 2010 ending balance was$545 million compared to a $1.4 billion ending balance in 2009. The 2010 Statement of

Cash Flows details the reasons for the significant change in the cash balance:

Cash From Operating Activities $4.6 billion in 2010 compared to $5.1 billion in

2009. Decrease in cash due to a change in the inventory levels and working capital being

offset by increased earnings.

Cash From Investing Activities - $1.0 billion in 2010 compared to $755 million in

2009. Change due to increase Capital expenditures and low proceeds from sales of

property and equipment. Determine the amount of capital expenditures spent in 2010.

Cash From Financing Activities $4.5 billion in 2010 compared to $3.5 billion in

2009. Change due to repurchase of common stock totaling $2.4 billion and $1.6 billion in


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cash dividends paid to stockholders. This offset by a $998 million increase in proceeds

from long term borrowing in addition to a $745 million decrease in repayments of long

term debt.

Based on these findings, it is strongly recommended that Home Depot implement

procedures that will increase its cash balance through its operating, investing and

financing activities.

After performing a ratio analysis of Home Depot, based on the 2010 ending balances, thecompany remained stable in the coverage, activity, and profitability ratio categories.

However, there company suffered decreases in the liquidity ratio category which

includes the current ratio, cash ratio, and the quick ratio. Home Depots liquidity ratios

measure the companys ability to pay off short term debt obligations by turning into

short-term assets into quick cash to cover these short-term debts. The primary reason for

these decreases is due to the low cash balance which serves as a major variable when

calculating these two ratios

Criteria: Home Depot will need to increase its cash flows from operating activities by

enhancing its product and customer service base. It needs to be more cost effective in its cash

flows of investing activities by minimizing its capital expenditures. It also needs to be more cost

effective in its financing activities by offsetting the huge stock repurchase and cash dividend

payout scheduled in the next fiscal year with increased long term borrowings and cash proceeds

from sales of its own common stock.

Cause: Cash received from Home Depots operating activities dropped modestly during 2010.

However, Home Depots investing and financing expenditures increased significantly during

2010. This was primarily due to changes in inventory levels, increased Capital expenditures, low


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proceeds from sales of property and equipment. In addition Cash was used extensively in 2010

to repurchase common stock and pay out cash dividends.

Effect: The Cash Balance on the Balance Sheet dropped notably by 62% in 2010. The 2010

ending balance was $545 million compared to a $1.4 billion ending balance in 2009. This 2010

ending cash balance has impacted the liquidity ratio category, which measures the companys

ability to pay off short-term debt obligations.

Recommendations: The following recommendations have been made in regards to increasing

Home Depots Cash Balance in 2011 through its operating, investing and financing activities:

In order to increase cash flows generated from operating activities, it is recommended

that Home Depot continue to enhance its customer service base, expanding product

service and enhance its online/internet exposure. These factors will allow Home Depot to

increase its net sales and net earnings.

Home Depot will need to be cost effective in its investing activities. It is recommendedthat Home Depot minimize its capital expenditures which can be accomplished though

several methods that include:

StoresTo be cost effective, we suggest that no new stores should be opened within the

next fiscal year. Out of the $1.1 billion spent on capital expenditures in the last year 9%

was utilized in the opening of 8 new stores. This money could be better used in

reevaluating and reinvesting in currently opened stores. As what was done with the

closed stores in china, any other stores found non-profitable should be up for discussion

of closing. Senior management can set what standard they feel each store should be

operating at, and from there stores that are performing poorly should be evaluated.


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Leases - Another cost effective savings for the company would be to own the land and

building of its stores. Currently of the 2,248 stores, 89% are owned directly by the

company. The 11% that is leased had a base cost of $504 million during last year and is

expected to increase to just around $570 million for next year. Home depot should

reinvest some of its money into purchasing the land the leased stores are placed on.

Although this would be an initially large cost, it would be worthwhile in the long-term.

The company would be building equity and only have to pay the purchase price one time

versus paying someone elses mortgage continuously over an extended period of time.

Moreover, if anything were to happen to the store, the building could be sold or rented

out to another company.

Home Depot will also need to be cost effective in its financing activities. In 2010, HomeDepot spent $2.4 billion on repurchase of its common stock through it stock repurchase

program and they also paid $1.6 billion in cash dividends to its shareholders. When

Home Depot started its Stock Repurchase Program in 2006, it had two main goals: 1) the

firms open to buy will creating a sustained underlying bid for the stock. 2) It can

catalyze share price movement, hopefully upward while putting money in shareholders

pockets. Since its inception the program has grown rapidly and thus far spent $30.1

billion in the repurchase of stock. These monies could have been used more efficiently to

help the whole company and not one portion of it. Even without the repurchase of stock,

the company has fared very well with continuously growing stock prices yearly and

above average industry dividend payout.

It was recently brought to our attention that the Board of Directors recently voted to continuethese activities in the next fiscal year. In order to offset these expenditures, it is recommended

that Home Depot increase its inflow of cash from outside investors such as banks through long-


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term borrowings. Home Depot is in a stable financial position where it can receive more long-

term borrowings with maturity dates that extend beyond one year. In addition, the company has

millions of its own shares of common stock where its proceeds can be used to pay down its long-

term borrowing (debt).

Another recommendation for offsetting the financing expenditures would be for HomeDepot to be more aggressive in its selling of common stock. Home Depots stock has

been on the rise for several years and the selling of its common stock can bring in huge

resources (cash) into the company especially when its in a position of earning mass

profits. By being aggressive in increasing its stock options to shareholders will allow

Home Depot to earn more proceeds from its sales of common stock?

Henceforth, by offsetting the huge stock repurchase and cash dividend payout in the next fiscal

year with increased long-term borrowings and cash proceeds from sales of common stock, will

definitely provide minimal effect on Home Depots cash and cash equivalents.

Audit of Cash Balances and Liquid Assets

Audit Findings:Based on work performed during the fieldwork phase these are the following findings

relating to Home Depots audit of Cash Balances:

In testing the cash balances, we did not find any discrepancies in the bank reconciliations,bank confirmations, and bank statements. Henceforth, the cash balance on the balance

sheet does properly represent all cash and cash items on hand, in transit or on deposit

with third parties (i.e. financial institutions). The Cash balance does reflect a proper

cutoff of receipts and cash disbursements.

In reviewing the confirmation of debt balances received from Wells Fargo and Bank ofAmerica and comparing these balances with the general ledger accounts, the debt


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balances are properly classified. Henceforth, the Cash balance is properly classified in

the financial statements and any restrictions on the availability of funds are properlydisclosed.

D. ERP and First Phone

Audit Findings: Enterprise Resource Planning - ERP

From the audit teams samples of information we concluded that 50% of the four top gross

profiting stores in the region utilize the ERP system. They are firmly the 3rd

and 4th

top gross

profiting stores. Of the 15% sample of stores taken from the southern region 88% continue to use

the original FIFO inventory method. Of the 420 stores in the southern region 395 use the FIFO

method.

One hundred of the stores in Canada use have implemented the ERP system, and function

under the WAC inventory method. Management interviews suggest that the ERP inventory

system proved successful in the Canadian market and stores that have undergone the conversion

in the southern region.

Tighter inventory controls in the region have made current inventory reports a lot more

accurate. These controls provide a greater understanding of the affects of the current inventory

methods in place and provide substantial inventory controls for the future.

Criteria: An inventory system needs to be implemented in the United States stores that promote

strong inventory controls, more accurate reporting information, and a simplified more effective

system for projecting future company profits from the inventory perspective.

Cause: The current FIFO method being used by the company is proving to be less effective

compared to the Canadian stores that currently use the ERP weighted average cost method of


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accounting. Inventory controls need to be tightened and designed where more reasonable gross

profit projections can be made.

Effects: The conversion to the ERP system will give the company better control of inventory

cost. Gross profit projections will be a lot more reasonable and accurate as a result of using the

ERP inventory system compared to the traditional FIFO method. Inventory managers in their

respective stores and warehouse will be required to take better inventory controls to ensure the

ERP conversion is successful.

Recommendations: The audit team suggests that store management should strategically move

forward with the ERP inventory system conversion. The conversion should start with the stores

in the southern region. After two years, the same process and store group rate of 7% should be

carried out in the next region of choice within the U.S. This process should be performed in

increments of 2 years until all 4 regions have begun the conversion.

Of the 420 stores in the southern region, and the remaining 395 stores using the FIFO

inventory method, the conversion should be implemented in groups of 30 that are roughly 7- %

of the remaining stores using the FIFO method. When all conversion steps are taken properly and

thoroughly, results can be properly measured and analyzed, and company staffing directly related

to the ERP conversion will be relevant and not over exhausted.

Stores to Consider/ Implementation- the stores to consider are the stores utilizing theFIFO method who have been considerably stagnant in income and growth. Theses stores

need to be profiting stores. This stipulation of stagnant income and profitable must be

considered. For the ERP transition to be successful, they need to be implemented on

stores who have an optimistic history and a positive balance sheet and income statement.

These foundational stores will give management a great understanding of how the ERP


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system affects profiting stores. These stores should be in the scope of the fore mentioned

guidelines but be carefully chosen by management. The impact these stores have on

current and future financial result should be properly considered before undergoing the

conversion.

The only exception should be made on stores that are failing and have exhausted all othermethods of survival. Theses stores need to be monitored very carefully and the affects of

the inventory system conversion must be recorded by showing the direct impact it has on

the life on the store. A final decision on the going concern of these stores should be made

with in the first year of the ERP conversion.

Duration- The duration of this conversion process, if followed by the fore mentionguidelines, will be between 13-15 years for the southern region and 15-22 years for the

entire North American foot print. This is at a rate of 7 % of stores a year. To properly

analyze the conversion, the stores must function under the WAC method for at least 2

years, if it proves unsuccessfully for the store; proper steps should be taken to convert the

store back to the FIFO method.

By following these steps the ERP conversion should prove successful. Management

discretion and changes in the economy should all be considered when pursuing this conversion.

Audit Findings A: First Phone

Home Depot has provided its employees with a new device- the First Phone that is a

powerful tool for them. It is a multi-use technology that enables people to check stocks and

answer customers questions.


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We conducted an interview of management, employees, and customers to gain anunderstanding of the use of the First Phone and improvements it has made for customers.

From our interviews we did not uncover any significant findings.

Through these interviews we were able to investigate through management, employees,and customers that the First Phone has improved the customer service within the store

locations and have improved communication among employees throughout the

departments.

We do not have any recommendations for the implementation and store use of the FirstPhone. It is operating effectively and there are controls in place as they relate to the First

Phone.

The hand-held device functions as a phone, walkie-talkie and mobile register, in additionto an inventory management and business analytic tool.

The First Phone speeds up the checkout, which significantly helps with the customers,turn over.

The device looks like a smart phone with full keyboard and 4 inch screen. Employeeshave to use stylus to make a selection on the display and can hook up printer or card

scanner to it. This helps with faster printing out labels from the aisles and to check out

customers. The First Phone can also be used as a laser scanner.

Criteria: Home Depot has made huge step forward with the introduction of the First Phone.

Other

Group a -Revised 3(1)

Documents

Transcript of Group a -Revised 3(1)