Group A- Home Depot

Internal Audit Group A Home Depot Akosua Agyeman Vanya Ballesteros Edward Baynes Group Leader Rosemarie Forde Maura Medvitz James Small

Group A- Home Depot 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.

Group A- Home Depot INTRODUCTION Topic A Organizational 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

Group A- Home Depot

received in 2010 was properly recorded and that all cash disbursements in 2010 were properly authorized and documented. Topic D ERP 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 instore 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.

Group A- Home Depot 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) and

employees 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 the

importance of internal control as required by SOX. Review and observe policies and procedures adapted to satisfy internal control requirements.

Group A- Home Depot 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 by employees.

Gather and review a sample of employees time cards to verify that employees

were 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 performing

functions 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 the

account(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 the

controls surrounding the input of this information into the system.

Group A- Home Depot

Review the approval process for updating policies and how often these policies

are updated and presented to the Board of Directors. C. Financial Statement Analysis and Testing Of The Cash Balances Analysis of Financial Statements Gather and review the current year ending financial statements. Review current year ending balance as it relates to last years financial

statements. Compare beginning and ending balances. Investigate unusual or

significant change in all accounts. Set a threshold for variances to determine which accounts will be further

investigated. 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, significant

changes in operating revenue, expense or debt, restructuring, new lines, products, or activities). Review notes in the financial statements to see if any unusual transactions are

disclosed. See if anything was done differently in 2010 than in 2009 that may cause concerns. Highlight and address unusual activities during the fiscal year.

Group A- Home Depot Testing of Cash Balances and Liquid Assets

Obtain and understanding of Home Depots cash management system and the

business 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 asset

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

D. First Phone/ ERP Inventory System First 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 operating on a secure software system. Access reports that are generated from the First Phone device to do an analysis as to if there 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 the store. Make sure the store layout is both accessible for employees and

customers.

Group A- Home Depot

Observe if there is enough space for the store inventory to be displayed

and 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 greater

accuracy 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 inventories and retained earnings.

Gantt Chart - See attached budgeted hours

Group A- Home Depot WORK PROGRAM PHASE A. Management & Organizational Chart

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Obtain or prepare an up-to-date organization chart with description of each work

function. Interview personnel and associated supervisors from each department to verify

job 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 and

processes concerning: Policies, procedures, standards, and rules, relevant to the different functioning department. Do a comparison of the companys practices with other similar organizations to

determine efficiency of processes. Is the company considered a leader in its industry? Select and evaluate key practices to verify that they are consistent with procedures

and rules. Prepare a questionnaire to evaluate internal controls

B. Human Resources/Payroll Function Interview the HR hiring managers to gain an understanding of the interview

process that is followed and the hiring procedures that are followed. Review the employee manual that is given to the employee at the time they are

hired 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 the

HR departments complete the hiring paperwork. Test a random sample of new employees and payroll to make sure what the

employee 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 to

review the time of employment. Review the employee file and any access the employee had to assure they have

been terminated from the system and payroll. Obtain or prepare an up-to-date payroll information chart for easy visualization of

the payroll process and controls. Inspect a sample of timecards, which should have employees name and

department number and supervisors approval for each workweek. Review overtime work policies by the respective department. Look to see if

appropriate 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 Assets Financial 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 2009

financial 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 with

2009. 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 significant

changes 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 are

disclosed. 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 the

business (economy, competition, regulation, and accounting practices). Interview chairman of the audit committee and obtain internal factors affecting

the 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 any

unusual activities during the fiscal year.

Group A- Home Depot Testing of Cash Balances and Liquid Assets

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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 ratio

and determine if there were any significant changes. Look for changes in working capital and debt balances. Compare these changes

with 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 treasury

activities with company policies. Confirm bank balances of cash accounts by requesting confirmation of bank

balances 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 the

Board. 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 System Operational Reporting First Phone & Third Party Vendors In reviewing the First Phone the auditor will first interview management

for 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 a

random 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 it

is 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 review

will 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 for

check out purposes to make sure it is properly checking out customers. The auditor will review the analytic reports for the following details: i) ii) Interview

Review if the First Phone is meeting the customers needs.

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 security

purposes. 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 the

First 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 corporation

will 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 associated

departments. 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 operational

reports. 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.

Group A- Home Depot Is equipment managed properly?

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Facilities and Equipment The auditor will observe each department to make sure it properly stocked

with inventory and that items are accessible for the customer. The auditor will review how the inventory is stocked to assure it is visible

for the customers and the prices are properly labeled for each item. The auditors will review the department to make sure it is safe and that

items 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 and

that 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 provide services 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 because some 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 as observations 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 are generally 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 were reviewed. 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 in safeguarding 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)

Group A- Home Depot B. Human Resources

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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. recorded. Amounts were properly

Inquired of management if about contractual agreements, union contracts, pensions, other post-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 summary report. 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 are being 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 employee expenses 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, Workers Compensation, 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 of employees the following findings were found: With nearly 2,100 stores in the United States, Mexico and Canada and new stores continuing 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 of employees that leave the company. At time that Home Depot is placing employees in leadership positions, about 80 percent of those are internal promotions (Home Depot, Executive, 2012). Our findings indicate that there are, loyal older people and a low turnover rate by retailing standards (Freudenheim, 2005).

Group A- Home Depot

A sample of 30 files was tested for new hires at Home Depot.

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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 system properly with the employee set up properly.

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

The set-up of new employees in the payroll was tested for dual review and there were 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 Home Depot.

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

The test worked showed that out of 30 employees that were terminated there were 2 employees 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.

Group A- Home Depot Code of Conduct

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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 the policies and procedures that are implemented by Home Depot. These policies need to be updated on a yearly basis and reviewed at the annual meeting that is held by the Board of Directors.
C. Financial Statement Analysis and Audit of Cash Balances Financial 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 Sales Sales increased 2.8% in 2010. Gross Margin Margins increased 4% in 2010. Operating Expenses Expenses decreased 0.8%. Net Earnings Earnings increased 27.4%. Cash Cash decreased 62%. Total Assets Assets decreased 1.8%. Total Liabilities Liabilities decreased 1.2% Total Stockholders Equity Equity decreased 2.6%

Group A- Home Depot Notable Findings of Significant Changes Of Consolidated Financial Statements

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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 closed underperforming 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 that was 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.

Group A- Home Depot Testing of Cash Balances and Liquid Assets

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Review of the Balance sheet and Statement of Cash Flows is complete. Findings are indicated 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 working capital and debt balances. These changes did not affect the cash disbursements for 2010.

An interview was conducted on Wednesday November 28, 2012 with Dwaine Kimmett who 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 has served 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 Treasury department 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 from Wells Fargo and Bank Of America both 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 of America 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 Bank of 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 Phone ERP operational inventory reports from management and associated departments Two weeks prior to the inventory operations department visit, Susan Gray, vice president of inventory 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 be available 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 secretary that 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 now and 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 for the 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. These stores 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: operational reports. Two days after submitting the questions to the inventory management, a response was received. 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 personnel directly involved in developing and distributing

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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 unknown and 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. In many 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 method of 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 the audit 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 were approved 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-Noble shared 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. 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 These initiatives have been put in place to ensure the

(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 experienced as surge in Net Promoter Scores (Fiorletta, 2012). The First Phone was such a success that Home Depot has made the decision to implement a 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 the payroll 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 VOIP telephone, a store walkie-talkie, and label printing with POS. The First Phone in Home Depot allowed the sales associates to bring the customers service. 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. Employees have 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 .NET Compact 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. 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 device automatically 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 each employee. 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 the employees did.

The testing also included using the access sheet that is filled out by a manager and given to 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 VOIP telephone, a store walkie-talkie, and label printing with POS.

The First Phone in Home Depot allowed the sales associates to bring the customers service. 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 .NET Compact 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 system application 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 because of 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 is proper 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 a constructive 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 that employees can model as a way of maintaining a culture of honesty. Proper segregation of duties supports an organizational internal control by helping to prevent, 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 these employees 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 Training to 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 make

jobs 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 workers to 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 some employees 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 are taken 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 to Home 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: employees: The Human resource department needs to implement a process so that there are more controls 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 to remove 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 resources and 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. Three recommendations have been made in regards to terminated

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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 any changes or updates that are necessary. The policies that are updated are not reviewed at the annual meeting for the Board of Directors. 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 been reviewed 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 that they are updated when a new process or system is implemented. On an annual basis management will meet with the executive team to provide the policies that have been updated for their review and to have them presented to the Board of Directors.

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Board of Directors will meet on an annual basis to review policies and it will be noted in the minutes that they reviewed policies and that they approved them.

Payroll Audit Findings: Based on work performed during the fieldwork phase these are the following findings relating to Home Depots operational audit of Payroll Department. We did not uncover any discrepancies in the either the Payroll functions. Management is effectively monitoring this area and strong controls are in place when it comes to segregation of duties, record keeping, authorization, and check distribution (see prepared flowchart of current payroll processes). We are also satisfied that there is no need for adjusting and reclassification entries for these two function areas. This satisfaction level was achieved from direct mathematical evidence of calculations, recalculations, and reconciliations performed by our audit staff on the data provided by management. We have no recommendations for these functions as they are effectively being managed, and transactions are correctly being posted to the subsidiary ledgers, and control accounts.

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(Figure B: Payroll Flowchart Prepared by Rose Forde Adapted 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 halt and 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 that indicate 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, the company 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 recommended that Home Depot minimize its capital expenditures which can be accomplished though several methods that include: Stores To 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, Home Depot 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 continue these 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 longterm 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 longterm borrowing (debt).

Another recommendation for offsetting the financing expenditures would be for Home Depot 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 of America 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 properly disclosed. 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 the FIFO 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 other methods 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 mention guidelines, 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 an understanding 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 First Phone. 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 addition to 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. Employees have 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 retailers have mobile checkout technology, but they cannot offer all the advantages of the Home Depots new device. Cause: The First Phone makes possible the sales associates to look up stock inventories, stock location in the store, shipment schedules and neighboring store inventories, in addition to price

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and sales information. These functions make this piece of technology much more advance compare to what the competitors are using. Effects: Home Depot has noticed increase in profits ever since the new device was adopted. The First Phones helps employees save times, and lessens the mistakes. It saves shipping cost, labor cost, and increases the customers satisfaction. The whole customer service experience in the store has changed. The ability to check out customers away from the register has save time for people to line up on line and have saved them pushing the heavy carts from one side of the store to the registrars. Also, the new devise helped the sales associates to provide fast answer to customers about items in stock, prices, and quantity available at the store. Audit Findings B: Facilities as it relates to First Phone Through a review of the safety that encompasses the use of in store equipment our review provided the following findings and recommendations: Home Depot does not have a safe workplace that their employees work in and they have been cited for this, charged with fines due to violating health and safety measures that need to be followed in the type of work environment. It is causing Home Depot to have to fines that total $51,480 (OSHA, 2012). The workplace around eight electrical equipment panels was used for storage, which consequently restricted employees access to circuit breakers in the event of an emergency (OSHA, 2012). This is not the only violation that Home Depot has been cited with. There are two other violations involve missing breakers and uncovered openings in electric panels, as well as a lack of protective eyewear for an employee operating a saw (OSHA, 2012).

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The workspace that employees need to have access to needs to be safe and at the same time accessible to employees.

Criteria: Home Depot needs to focus on the safety of their employees in the work environment. They should pass the Occupational Health and Safety inspections without violations. Cause: Currently, Home Depot has not passed the inspections and they have been faced with fines due to the violations. Home Depot has not been following safety regulations in regards to the electrical panels, storage surrounding the electrical equipment panels, and employees wearing protective eyewear. Effect: This has caused Home Depot to be charged with fines due to violating health and safety measures that need to be followed in the type of work environment. It is causing Home Depot to have to fines that total $51,480 (OSHA, 2012). Recommendations: Four recommendations have been made in regards to employee safety: Home Depot needs to eliminate the storage placed around the electrical equipment panels and continue to keep this area free of items that leave it inaccessible to the employees. The stores need to find another area where storage items could be kept and fine employees if this area is used for storage. An employee needs to be assigned the task to conduct an internal audit of the electrical equipment panels to assure storage is not being kept there. The electrical panels that are not covered need to be covered. An employee should be assigned on a random but no less than monthly basis to conduct an internal audit of the electrical panels to assure that they are properly covered. Employees must be required to wear their protective eyewear. In the case that the employees are not following this safety requirement then they should have to face a fine

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(reprimand or something else but not necessarily a fine). Home Depot should consider doing a training session again as to the safety requirements. As part of the training program Home Depot needs to review with their employees that the fines and violations that they have to face. They should develop a plan that they will follow to ensure that they will pass the next inspection without facing fines. It is important that these issues are addressed at all the Home Depot locations to make sure those similar situations do not exist or that they do not occur in the future.

Group A- Home Depot References 2010 Financial Statements For Home Depot (2011). Retrieved November 28, 2012 from http://www.marketwatch.com/investing/Stock/HD/SecFilings?seqid=21&subview=all Big Charts (2011). Retrieved November 28, 2012 from

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http://bigcharts.marketwatch.com/historical/default.asp?symb=hd&closeDate=1%2F28% 2F11&x=25&y=23 Blair, Adam (2010). Retail Info System News. Home Depots $64 Million Mobile Investment Rolls out to 1,970 Stores. Last retrieved on November 29th, 2012 from http://risnews.edgl.com/retail-news/Home-Depot-s-$64-Million-Mobile-InvestmentRolls-Out-to-1,970-Stores56966. Clark, Ken (May 29, 2012). At Home Depot, First Phone Junior. Home Channel News. Retrieved November 9, 2012 from http://www.homechannelnews.com/article/homedepot-first-phone-junior. Fiorletta, Alicia. (27, June 2012). Home Depot Creates Better Store Experiences with Mobile Technology, In-Store Wife. Retrieved November 27, 2012 from http://www.retailtouchpoints.com/in-store-insights/1689-home-depot-creates-better-storeexperiences-with-mobile-technology-in-store-wifi. Freudenheim, Milt. (23, March 2005). More Help Wanted: Older Workers Please Apply. Retrieved November 25, 2012 from http://www.nytimes.com/2005/03/23/business/23older.html Home Depots Corporate Governance Committee & Board of Directors. Retrieved November 29, 2012 from http://ir.homedepot.com/phoenix.zhtml?c=63646&p=irolgovCommittee&Committee=8271

Group A- Home Depot Home Depots Senior Leadership Team. Retrieved November 29, 2012 from

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https://corporate.homedepot.com/OurCompany/Leadership/Pages/SeniorLeadershipTeam .aspx Industry Guide Retail Technology (March, 2011). A Look at The Home Depots First Phone. Last retrieved on November 10, 2012 from http://www.retailindustry.com/retailtech/articles/2011/homedepot-first-phone.html. Janowitz, Neil (2012, April 16). Home Depot Innovates Customer Checkouts. Retrieved on November 9, 2012 from http://www.fastcompany.com/1826851/home-depot-innovatescustomer-checkouts. Kieso Weygandt Warfield. Intermediate Accounting, 14th Edition. John Wiley & Sons pp. 244246 & pp. 1548-1549 Occupational Health and Safety (OSHA). 2012, May 19. OSHA Hammers Home Depot for Repeat Electrical Hazards. Retrieved November 28, 2012 from http://ohsonline.com/articles/2012/05/19/osha-hammers-home-depot-for-repeatelectrical-hazards.aspx. The Official Board.com Home Depot (2012). Retrieved on November 14, 2012 from http://www.theofficialboard.com/org-chart/home-depot. Home Depot, Inc. (2012, Feruary). Political Activity and Government Relations Policy. Retrieved on November 14, 2012 from http://phx.corporateir.net/phoenix.zhtml?c=63646&p=irol-govcommcomp. Home Depot, Inc. (n.d.). Stock Ownership and Retention Guideline for Executive Officers. Retrieved on November 14, 2012 from http://phx.corporateir.net/phoenix.zhtml?c=63646&p=irol-govcommcomp.

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Home Depot, Inc. (12, August 2008). Policy on the Consideratoin and Evaluation of Candidates for Membership on the Board of Directors. Retrieved on November 14, 2012 from http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irol-govcommcomp. Home Depot, Inc. (1, May 2012). Corporate Governance Guidelines of The Home Depot, Inc. Board of Directors. Retrieved on November 14, 2012 from http://phx.corporateir.net/phoenix.zhtml?c=63646&p=irol-govcommcomp. Home Depot, Inc. (2, June 2011). By-Laws of the Home Depot, Inc. Retrieved on November 14, 2012 from http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irolgovcommcomp. Home Depot, Inc. (May 2012). Business Code of Conduct and Ethics. Retrieved on November 14, 2012 from http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irolgovcommcomp. Home Depot, Inc. (n.d.). Amended and Restated Certificate of Incorporation of the Home Depot, Inc. Retrieved on November 14, 2012 from http://phx.corporateir.net/phoenix.zhtml?c=63646&p=irol-govcommcomp. Home Depot Training Guide. (n.d.) SOQ Forecast Report. Retrieved on November 17, 2012 from https://homedepotlink.homedepot.com/enus/Related%20Documents/SOQ%20Forecast%20Report%20Training%20Guide.pdf?Mo bile=1&Source=%2Fenus%2F_layouts%2Fmobile%2Fview.aspx%3FList%3D1d89c8e5-a6c3-47ef-9dabb2479614600f%26View%3D5b5aa0d2-4f99-4a17-b9ace6fecd8e0f8e%26CurrentPage%3D1.

Group A- Home Depot Home Depot Training Guide (24, September 2007). Import Supplier Handbook. Retrieved on November 17, 2012 from https://homedepotlink.homedepot.com/enus/Related%20Documents/Import%20Supplier%20Handbook%20092811.pdf. McGrill Internal Audit (2011). Audit Objectives and Processes. Primary Project Types. Operational Audits. Retrieved December 6, 2012 from http://www.mcgill.ca/internalaudit/objectives/primary/operational/ Retail Info Systems News. (1, March 2011). Home Depot Quickly Hts 1 Million Mark for Mobile POS Transactions. Retrieved November 27, 20121 from

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http://risnews.edgl.com/retail-best-practices/Home-Depot-Quickly-Hits-1-Million-Markfor-Mobile-POS-Transactions70927 Schectman, Joel (2012). CIO Reports. Home Depot Rolls Out New Mobile Devices for Workers. Last retrieved on November 30, 2012 from http://blogs.wsj.com/cio/2012/06/21/homedepot-rolls-out-new-mobile-devices-for-workers/. Schermerhorn, John R., Hunt, James G., Osborn, Richard N., and Uhl-Bien, Mary. (2010). Organizational Behavior. (11th Ed.). Chapter 6. John Wiley & Sons. Society For Industrial and Organization Psychology, INC. (2012). Home Depot Executive to Discuss Hiring and Retention Strategies During Consortium. Retrieved November 25, 2012 from http://www.siop.org/Media/News/homedepot.aspx