An instructional note on business risk and audit implications: Seasonality at Mattel

This instructional note provides materials that can be integrated into a current auditing course to demonstrate the use of a company’s disclosures to understand the company, assess business risks, and identify audit implications. Assessing business risks in the audit process has been a key thrust of academic and professional investigation over the last 20 years, and Auditing Standard 12 raised the profile, importance and requirements for assessing business risk. Teaching the assessment of business risk in the classroom, however, is challenging. Although auditors may get access to companies’ internal procedures of risk measurement and management, students would not. But there is a wealth of information that students do have access to in required SEC filings, as well as at public companies’ investor relations websites. This note provides a specific example of business risk and audit implications using information about seasonality at Mattel.

► Seasonal sales have important implications for the audit of accounts receivable.
► Seasonality has important implications for the audit of a manufacturer’s inventory.
► Seasonality could lead to quarters with negative cash flows from operations.