ADMS 4551 Lecture Notes - Denim, Arena, Costco
11 May 2018
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Epoch Jeans
You have been assigned audit senior for the audit of Epoch Jeans. This is a first year
audit engagement for your firm. Based upon your audit firm’s client acceptance
procedures, it was determined that Epoch’s management team is highly experienced and
has high integrity. Epoch changed auditors because it wanted an audit firm with more
experience with public offerings. Discussions with the previous audit firm found it had
encountered few problems in the past, although, last year there was a dispute regarding
the valuation of inventory.
Epoch Jeans is an 85-year old public Canadian company that manufacturers and retails
quality-cut jeans. Epoch’s philosophy is to offer its customers a variety of prices but to
never compromise on quality. Fifty percent of its sales are on credit to a variety of
specialty denim stores in North America and Europe and 50 percent are through its Epoch
boutiques in Canada.
The Canadian retail jean industry is characterized by fierce competition. Retailers in
Canada are serving customers without borders. They face competition across the border
and online. Big-box retailers, such as Costco and discount outlets put considerable
pressure on retailers’ bottom-line. Many of Epoch Jeans’s current retail customers are
asking for discounts and more liberal return policies in order to remain competitive.
Despite these challenges, Epoch Jeans continues to expand. It has ramped up its store
expansions with its first U.S. boutiques in New York City and San Francisco. It is also
expanding beyond its core denim line to include a 15-piece sportswear collection called
Epoch Sportive.
In addition to the challenge of meeting the demands of trend-driven jean fans, Canadian
jean manufacturers face the additional challenge of producing clothing at costs that are
comparable to those of Asian manufacturers. In response, many Canadian manufacturers
have moved their production offshore. However, Epoch Jeans continues to manufacture
its product in Toronto.
In order to keep ahead of the competition, Epoch Jeans invests heavily in research and
development. It has a state-of-the art production facility that includes an on-site mill and
dye house. This enables it to react quickly to the market and to respond quickly with
smaller runs. It also keeps core items in stock and ready to ship at a moment’s notice.
Epoch Jeans has a 3-member design team that travels worldwide to search out what’s hot.
Due to its heavy investment in research and development and the current shortage of
additional capital (due to the worldwide recession), the company has been experiencing
negative cash flows for the first time in 50 years. In response, management is currently
negotiating with its bank for increased financing. The company may offer a new class of
shares to the public in the next year (if the capital markets improve).
Document Summary
You have been assigned audit senior for the audit of epoch jeans. This is a first year audit engagement for your firm. Based upon your audit firm"s client acceptance procedures, it was determined that epoch"s management team is highly experienced and has high integrity. Epoch changed auditors because it wanted an audit firm with more experience with public offerings. Discussions with the previous audit firm found it had encountered few problems in the past, although, last year there was a dispute regarding the valuation of inventory. Epoch jeans is an 85-year old public canadian company that manufacturers and retails quality-cut jeans. Epoch"s philosophy is to offer its customers a variety of prices but to never compromise on quality. Fifty percent of its sales are on credit to a variety of specialty denim stores in north america and europe and 50 percent are through its epoch boutiques in canada. The canadian retail jean industry is characterized by fierce competition.
