Kimberly-Clark Corporation

Audit Research Project

Group 11: NGoran Allangba, Joshlyn John, Oscar Martinez, Drew Raulston

Table of Contents
Introduction to Kimberly-Clark Corporation
Chapter 1: Client Acceptance Process
Chapter 2: Obtaining An Understanding of Kimberly-Clarks Environment
Chapter 3: Preliminary Engagement Activities
Chapter 4: Assessing Risks and Materiality
Chapter 5: Internal Control
Chapter 6: Planning the Audit
Chapter 7: Completing the Audit
Chapter 8: Evaluating the Results and Issuing an Opinion
Sources

Kimberly-Clark Corporation Introduction

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The company that we are going to perform an audit for is Kimberly-Clark Corporation, a
multinational personal care corporation. The majority of Kimberly-Clarks products are paperbased consumer products, with Kleenex facial tissues being their most popular product. The firm
grew exponentially in the next 50 years, becoming one of the largest producers of paper-based
goods. Kimberly-Clark has been known throughout their entire history as a well- respected firm.
Another reason we selected this company was because of how successful financially they have
been throughout the years.
Chapter 1: Client Acceptance Process
Before accepting Kimberly-Clark as one of our clients, we performed an extensive
background check and gathered as much information about them as we could.We reviewed
Kimberly-Clarks current business strategy and performance and we were impressed with both.
Kimberly-Clark is a well-known company and its products have been at the top of the market for
many years. We view this company as very low-risk, and we are confident that the company will
be successful for the foreseeable future. After obtaining permission from Kimberly-Clark, we
contacted their previous auditor, in order to gain a better understanding of our prospective client.
They were not required to give us any information, but they agreed to. The previous auditor left
on friendly terms; the Board of Directors at Kimberly-Clark require that the auditor is changed
every ten years. They were very helpful and offered us as much information as they could. We
also reviewed past financial statements from Kimberly-Clark and we were pleased with what we
found. The companys management seems to have a lot of integrity. All of the evidence we have
gathered leads us to the conclusion that Kimberly-Clark is a well-run business and has a high
internal control. We created an engagement letter that was signed by both our audit team and

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Kimberly-Clark. The letter laid out the basic groundwork of the audit, our responsibilities during
the audit, and Kimberly-Clarks managements responsibilities.
Chapter 2: Understanding Kimberly-Clark and its Environment
Kimberly-Clark is a multinational corporation founded and based in the United States of
America. Its headquarters are located in Dallas, TX, and has manufacturing operations in 39
countries. It manufactures personal care consumer products. Some of its known global brands are
Kleenex, Scott, Andrex, Huggies, Pull-Ups, Kotex, Cottonelle. In short, Kimberly-Clark
produces mostly hygiene products that people use on a regular basis, to make a positive
difference in their lives.
Kimberly-Clark was founded under the principles of quality, service, and fair dealing.
From the moment it was founded until today, it continues to follow these guiding principles. This
is how they work together with their partners, customers, and employees. Because of these
guidelines, their commitment to high ethical standards will remain constant when business
conditions change. This commitment is what drives Kimberly-Clark to perform well in such a
competitive global and domestic market. By managing their business responsibly, they can
secure the trust of their shareholders, employees, and other interested parties. K-Cs Global
Business Plan (GBP) is the companys strategy that focuses on growth opportunities and applies
greater financial discipline to their operations. Their strategy plan is designed to generate
sustainable growth and to improve shareholder returns. Their GBP involves:
Manage their portfolio to balance growth, profitability, and cash flow
Invest in brands, innovation and growth initiatives
Deliver sustainable cost reduction
Discipline capital management to improve ROIC and return cash to shareholders

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As a multinational corporation, Kimberly-Clark Corporation faces many regulatory
challenges that will affect the way it manages risks and mitigate costs. Lately, The U.S. has been
meticulously watching the international conduct and the exports of manufacturing corporations.
The government has increased the laws governing exports and have imposed large penalties on
multinational companies for violations of U.S. economic sanctions and export control laws. One
way the U.S. government is enforcing its laws on multinationals is via the Foreign Corrupt
Practices Act (FCPA). The FCPA is a law that prohibits companies from engaging in bribery and
corruption outside the United States and requires the maintenance of accurate financial books
and records. For this reason, Kimberly-Clark has to carefully manage its risk and adopt a proper
approach that fits its method of operations in order to avoid legal consequences.
There are many external risks factors that Kimberly-Clark cannot control. Their
international operations are mainly subject to social, economic, and political factors that can
impact their business. Also, competition is one of their main external risks that can have a major
impact on their financial results. They operate in a very competitive market against other wellknown products. Some of their competitors include domestic and international manufacturers
that may have better market penetration. As a multinational corporation, its operations can also
be affected by weak foreign exchange rates and fluctuations. Political instability in some Latin
American countries can adversely affect their operations as well.
Although K-Cs Global Business Plan has been very successful since 2003, their financial
performance has been affected mainly by weakening foreign currency exchange compared to
2014. Their net sales of $18.6 billion decreased 6 percent compared to 2014. In North America,
K-C generated 5 percent volume growth in their consumer business. The growth in North
America was due to innovations, promotions, and market share gains.

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Chapter 3: Preliminary Engagement Activities.
Due to our clients size, the audit work will be divided among different audit teams. By
different audit teams, we mean group audit teams that are geographically distributed. In the US,
the audit team will be composed of employees based in the domestic office in charge of the
engagement. Outside of the U.S, we will rely on member firms, and other public accounting
firms (from our global network) for performing the audit procedures for the subsidiaries
divisions of Kimberly-Clark. In terms of structure, the audit team will be required to have one
audit partner, a senior-manager, an audit senior, four audit staff members, one specialist in tax
and another in IT. For the qualification, our employees assigned to the different areas of the audit
have the technical background and the experience to serve on their audit team.
In order to assure that our audit team is independent and ethical, our firm has established
some safeguards. Those safeguards are related to pre and post-employment. In fact, our
employees are required to report any conversation with Kimberly-Clark prior to any audit work;
also employees involved in negotiating jobs with Kimberly-Clark are removed from the audit
team. As post-employment safeguards, if some of our employees have accepted employment
with Kimberly-Clark, the ongoing audit team will have to modify the audit plan in order to avoid
any risk of circumvention. Additionally, any former employees that already joined the KimberlyClark client, will have to start his/her work for our audit client a year after leaving the firm.
Finally, the firm requires the liquidation of all capital balances, stock, shares and the settlement
of retirement balances of Kimberly-Clarks former employees working with our firm, and also
the former employees hired by the client.
These safeguards are also applied to close relatives. In fact, an individual in the audit team would
have to report the existence of a close relative who has a key position, a significant influence and

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a financial interest in Kimberly-Clark. Failing to do so would impair the independence of that
individual.
Finally, the detailed code of ethics of the firm touches the area of professional
involvement with the audit client. This involvement related to the audit work is very important to
the firm. In fact, most of the company code of ethics addresses this type of involvement. To
make sure that those code of ethics is followed by the employees, an ethics seminar is organized
by the firm every two months. The purpose of that seminar is to put an emphasis on the
importance of ethics within the profession and also expand on the new set of ethics that has
recently been integrated into the code. After going through those safeguards, we can assure that
the members of the audit team are independent in this engagement.
Chapter 4: Assessing Risks and Materiality
An inherent risk is the likelihood that an error or fraud will enter the accounting system in
the absence of internal controls, which would affect Kimberly-Clarks financial statements. In
other words, it is a measure of how susceptible an account is a misstatement. Inherent risks in
our competitive strategy include uncertainties concerning trade and consumer acceptance, the
effects of consolidation within retailer and distribution channels, and competitors' actions.
Kimberly-Clarks competitors differ in different segments of the market. Some of the companys
competitors include Procter & Gamble Co, Clorox, Colgate-Palmolive Company, and L'Oreal. In
the market segment of Personal Care, Kimberly-Clarks market share is around 14%, while
P&Gs I market share is around 29%. In the market segment of Consumer Tissue, P&G still
has the bigger market share, surpassing Kimberly-Clark by 19%. Areas of Kimberly-Clarks
competition include brand loyalty, product quality, innovation, and marketing strategies.
Kimberly-Clark will not always be able to meet the demands of the market. Some changes that

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could affect the market share of companies are lower birth rates, and also consumer response to
price actions. If any of Kimberly-Clarks brands caught a bad reputation, the entire company
could suffer as a result. If there was a major increase in the price of raw materials that KimberlyClark needs, it could affect their financial standing. Kimberly-Clark depends on materials
derived from petroleum for a number of their products. Also in their tissue, they depend on a
material known as cellulose fiber, which is subject to price fluctuations. Kimberly-Clark is very
dependent on their manufacturing and distribution ability. It is vital to the companys operations.
Their manufacturing and distribution activities can be affected by inherent risks of natural
disasters, power outages, fires, labor strikes, environmental or political events, and anything else
that could affect the sustainability of their business. For a company as large and diverse as
Kimberly-Clark, the inherent risk will always be present. In an account such as inventory, which
is heavily involved in a companys ability to earn a profit, the inherent risk will naturally be quite
substantial. Based on our analysis, the inherent risk for financial statements as a whole is a
moderate 0.50. We believe that inherent risk within the inventories account is also at the
moderate level, although a little higher than with the financial statements as a whole. Our
calculated inherent risk, or IR, is 0.57 for the inventory account. We believe, based on our
research and interviews with various personnel, that Kimberly-Clarks control risk is quite low.
We further discuss their internal control in the next section, but we found their management to
have quite effective controls. For our model, we determined control risk to be 0.40 for the entire
financial statements, and 0.46 for the Inventory account. Detection risk is the risk that a
misstatement will not be caught by the audit team. By taking the desired audit risk of 0.05,
established by Kimberly-Clark Corporation, we found the detection risk for the audit. By using

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this equation: (0.05AR))/(0.57)IR)*(0.4)CR), we determined the detection risk to be 0.22 for the
engagement.
To help us determine what amounts we will consider to be either material or immaterial
on the engagement, we examined the 2015 financial statement of Kimberly-Clark Corporation.
As a base for determining materiality, we decided to use the companys Income From Continuing
Operations as a benchmark. The companys 2015 Income From Continuing Operations was
$1.613 billion. We determined that any amount that exceeds 5% of the $1.613 billion will be
material. In other words, any amount greater than $80.65 million will be considered material for
our engagement.
Chapter 5: Internal Control
Internal control is a crucial part of any audit being performed, for a variety of reasons.
First, we will give a refresher on what exactly defines the phrase internal control. Internal
control is a process enacted by a companys Board of Directors, management, and other
personnel that is designed to provide assurance for a companys ability to succeed in reliable
financial reporting, compliance with laws and regulations, and effectiveness and efficiency in
achieving their objectives. In other words, Internal control is how well the people in a company
are managing it. Internal control has become an important word in the business world since the
Sarbanes-Oxley Act of 2002, which requires all public companies to adhere to strict internal
controls. The management of a company has the main responsibility for maintaining an effective
Internal control. According to the Sarbanes-Oxley Act, management must provide a statement
declaring that the management has an adequate amount of internal control over their financial
statements, as well as a statement identifying the framework used to assess the effectiveness of
their internal control. Lastly, management must provide a statement giving their overall

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assessment of the companys internal control procedures. However, we as auditors also have a
responsibility when it comes to internal control. Auditors are required to give an opinion on the
effectiveness of a companys internal control. A companys internal control is important because
it determines the nature, timing, and extent of the entire audit. It determines what type of testing
will be done and how much testing will be necessary. In order to evaluate a companys internal
control, an auditor must first gain an understanding and document the internal control, assess the
control risk, and then perform tests of the controls. We found Kimberly-Clark to have an
extremely efficient internal control. The controls we focused on primarily were those related to
the inventory account. For a company as large as Kimberly-Clark, it would be easy to overlook
errors or mistakes, but our audit team found their controls to be very effective. A major control
relevant to our audit will be the organization and proper counting of inventory. This is the main
control related to inventory accounts and the proper recording of inventory is necessary for
accurate bookkeeping. The recording of inventory must be done by the person qualified to do the
recordings. Segregation of duties is another control relevant to our audit, and it is necessary to
ensure that the job is being done properly and efficiently. IT controls are also relevant, to ensure
that warehouses are locked up and secure, as well as having security passes so only authorized
personnel has access to the inventory. After inquiring with different personnel, observing
Kimberly-Clarks controls firsthand, and evaluating a variety of documents, we were able to
come up with an assessment of the companys control risk. In our opinion, Kimberly-Clark has
an effective internal control and therefore, a low control risk. We will rely less on substantive
testing and more on tests of controls.
Chapter 6: Plan the audit
Need For Specialists

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As auditors, our education and professional judgment will allow us to be knowledgeable
about business matters, especially how the inventory account is set up. Therefore, the need for
specialists in our audit is not prevalent since we are only auditing the inventory part of the
company and we have the proper knowledge and expertise for this engagement.
Illegal Acts
Our expertise of the industry has taught us what illegal acts can happen with regards to
inventory. Therefore, the possibility of illegal acts is high, but due to the effectiveness of our
clients internal control around inventory, we determined the possibility of illegal acts to be
rather small. In fact, our clients inventory count cycle, periodic obsolete inventory review and
the bills of materials will prevent, detect and correct any illegal acts. Also, the segregation of
duties that are in place in our clients organization, especially in the inventory sector, allow an
effective control of the inventory by avoiding letting an employee be at the beginning and at the
end of an inventory control.
Related Parties
In planning our audit, we requested from our client management personnel the names of
all related parties and inquire whether there were any positions occupied by these parties in the
different warehouse during the period.
Preliminary Analytical Procedures
By using preliminary analytical procedures, we were able to compare the changes in the
inventory account for Kimberly-Clark from prior financial statements in previous years to come
up with an estimate for the current year. After examining the prior account balances, we made an
estimate for the current Inventory balance, and it was in the same range as the amount on the
balance sheet. $17 million from 2014. We also compared the trends of Kimberly-Clark with the

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trends and Inventory account balances of similar companies in the personal care industry, such as
Colgate-Palmolive, Johnson & Johnson, and Procter & Gamble. After examining the trends of
each of these companies over the past four years, we found that the reported Inventory account
balances of Kimberly-Clark over the previous four years is consistent, and in fact almost
identical, with the trends of the other companies. After performing these analytical procedures,
we came to the conclusion that the reported balance in Inventory is consistent with our
expectations after researching growth trends.
Audit Program
After extensive examination and research, we have formed an audit plan that will aid us
in providing an opinion on the financial statements of Kimberly-Clark Corporation. Our
preliminary research and analysis of Internal Control have helped us to determine the nature,
timing, and extent of our audit. Specifically, we have narrowed down our audit plan to focus on
the Inventory account, so we structured the strategy in a way that would best help us to achieve
our goals. The inventory for Kimberly-Clark is sold to customers or to other businesses and
therefore has a direct and measurable effect on the companys income. Because of this close
relationship between inventory and the companys profit or loss, it is considered a high-risk
account and the testing we perform must be more substantive.
The first step in our audit will be to verify the existence of the inventory that is reported
on the Balance Sheet. In order to do so, we will need to perform substantive testing, as well as
tests of controls. In Generally Accepted Auditing Procedure 331.11, it is stated that if an auditor
has found the companys controls to be both effective and reliable, then that company may be
permitted to use a statistical testing procedure in order to determine the proper Inventory
balance. This is in place of the other technique, which would be to do a physical count of each

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Inventory item. For a company as large as Kimberly-Clark, this is extremely helpful. They are a
paper based personal care company, so their inventory is mainly low- value items, and they are
many in number. For this reason, they use statistical sampling techniques in order to do counts of
inventory. For our audit, we plan to observe an authorized Kimberly-Clark employee perform
this inventory count to determine its reliability. If we find that their procedures are both effective
and efficient, we will obtain records from other warehouse locations to verify that these same
techniques were performed there, and authorized by the proper personnel. If we find substantial
errors with their Inventory counting system, then we will perform more substantive tests, such as
observed physical Inventory counting. In our opinion, we do not feel that this will be necessary,
but we will be prepared nonetheless in case we find significant deficiencies in their counting
methods.
Another major component of our audit plan is to verify that all inventory has been
recorded in the current and correct financial period. This is related to the completeness assertion,
and this is another area that is susceptible to errors or fraud. The completeness assertion applies
to whether transactions have been recorded properly and in the right accounting period. We plan
on examining sales documents as well as shipping documents to make sure the transactions were
recorded properly. We will also trace the physical inventory count with proper documents, such
as purchase requisitions to ensure that all inventory is properly recorded. Also included in our
Audit Plan will be an inventory cutoff analysis around year-end, to help determine whether the
Inventory has been classified in the correct financial period.
Our audit team will also need to confirm that Kimberly-Clark has provided users proper
presentation and disclosure of their financial statements, and more specifically with respect to
Inventory. We plan on examining past financial statements and comparing them with the current

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reports. We will also make sure any pledges made by the company related to the Inventory
account are disclosed in the financial statements. It is very important that we gain a sufficient
confidence in their presentation to users because that is who we are doing this audit for. It is our
duty to give the users the most reliable and accurate opinion that we can, and we take this duty
very seriously. The next assertion we need to attest to will be that all inventory is properly
valued. We will inquire with proper management personnel to gain an understanding of how they
value their inventory. The company also employs the Lower of Cost or Market rule when
valuing their inventory, so we plan on doing substantive testing of how they perform this method
to make sure it is being done properly. The last assertion we plan on examining is the rights and
obligations assertion. This assertion is associated with whether or not a company has the rights to
the assets on its financial statements. Because inventory is a major asset in the balance sheet
account, we will need to do substantive testing. We will obtain sample inventory requisitions and
trace them to customer orders to confirm that the transactions are valid and properly recorded.
We will also confirm with other warehouse locations that the inventory on hand is actually
owned by Kimberly-Clark. We will confirm these amounts with authorized personnel, and we
expect to rely on this information due to the reliability of their Internal Controls. When it comes
to verifying the rights and obligations of a company, it is very important to trace the inventory to
its source documents. By doing so, we will be confirming that the inventory is actually owned by
Kimberly-Clark. Due to the large size of their inventory, we will have to do statistical sampling,
but we are confident in our sampling techniques.
This is the base of our audit plan, and as is the case with all audits, is subject to change.
We have allowed flexibility for the possible occurrence of subsequent events, omitted procedures
that have come to our attention, and material contingencies. We believe that by executing this

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plan for our audit of Kimberly-Clark, that we will be able to give an honest and reliable opinion
on their financial statements to the interested users. We expect management to be fully
cooperative with our audit and are not expecting any troubles.
Chapter 7: Complete the audit
Analytical review
After reviewing our clients inventory trends results and comparing that to the personal
care, consumer tissue and K-C professional industry and also the economic trends, we didn't
notice any irregularities from our client. In fact, the personal care, consumer tissue market have
increased between 3.5 and 4.5 percent over the last five years. Our client, on the other hand, has
had a slight increase in inventory from 2015 to 2016 which make sense due to the fact that
revenue of our client went down slightly. The inverse relationship between revenue and
inventory corroborate our client trends. Also, compare to our client biggest competitor Procter &
Gamble, there is no big departure. In terms of concurring partner review, we have had an
independent review of our audit work done by an experienced partner which is not part of our
audit team who has been the concurring partner for 2 years.
In terms of contingent liabilities, our client management has identified and evaluated
contingencies such as product warranty liability and the threat of expropriation of assets
evaluated at $2.5 million USD in their subsidiaries in Kimberly-Clark Kazakhstan. Our clients
management also identified product warranty liability to be $1 million USD. To corroborate our
clients contingencies, we first verified the product and warranty liability. To do so we compared
the sales receipt of products that are covered by warranties and match that with the product
warranty liabilities. By doing that, we were able to confirm those liabilities.

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For the threat of expropriation of an asset, we requested from our client management a
letter of counsel for corroborative evidence concerning the contingency to be sent. After
receiving the response from our client legal counsel, we conclude that the $2.5 million USD
were probable and the estimation was accurate.
Through the completion stage, we didn't find any going concern issue as well as any issue
related to significant estimates. After reading the minutes of meetings, the interim financial
statements, and inquiring of management about, we didn't find any subsequent events.

Chapter 8: Evaluating the Results of Our Audit

After completing our audit, we as an audit team are very pleased with the results. The
audit went smoothly as a whole, and we did not detect any fraud or theft from Kimberly Clark.
We found no significant deficiencies or material weaknesses after performing our tests, and we
feel very confident in our ability to issue an Unqualified Audit Report.

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Works Cited
"AU Section 331." AU 331 Inventories. N.p., n.d. Web. 19 Oct. 2016.
AU 337 Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments.
Yahoo, n.d. Web. 19 Nov. 2016.
"AU Section 331." AU 331 Inventories. N.p., n.d. Web. 19 Oct. 2016.
"Audit Planning and Risk Assessment." Audit Planning and Risk Assessment | ICAEW. N.p., n.d.
Web. 5 Nov. 2016.
"IAS Plus." ASC 450 - Contingencies. N.p., n.d. Web. 19 Nov. 2016.
"Kimberly-Clark Corp." KMB: Kimberly-Clark Corp Top Competitors and Peers. MorningStar,
n.d. Web. 15 Nov. 2016.
"Kimberly-Clark Corp. (KMB) | Inventory." Stock Analysis on Net. N.p., n.d. Web. 19 Nov.
2016.
"KMB's vs. Competition, Revenue Growth by Segments." Kimberly Clark Corp Competition
Revenue Growth by Company's Segment - CSIMarket. CSIMarket, n.d. Web. 15 Nov.
2016.
"Legal Statement." Legal Statement - KIMBERLY-CLARK PROFESSIONAL* NA. N.p., n.d.
Web. 19 Nov. 2016.
"The Use Of Analytical Procedures In Auditing." Accounting, Financial, Tax. N.p., n.d. Web. 11
Nov. 2016.

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APPENDIX
Item 1: Independent Auditors Report
Item 2: Audit Risk Model
Item 3: Inventory Cycle

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Item 1: Independent Auditors Report

To the Board and Directors and Shareholders of Kimberly Clark Corporation,
We have prepared and executed an audit of Kimberly Clark Corporations Balance Sheet as of
December 31, 2016 according to the rules and procedures outlined in the Generally Accepted
Accounting Principles. It is the responsibility of Kimberly Clarks management to issue a report
on the efficiency and effectiveness of their Internal Control. It is also their responsibility to issue
the financial statements for the current year, and have the documents signed and approved by
both the CEO and CFO of the company. Our responsibility as auditors is to offer a qualified
opinion on these financial statements as well as the companys Internal Control.
We conducted our audit in accordance with the standards provided by the Public Accounting
Oversight Board (PCAOB). It is our responsibility as auditors, based on the PCAOB standards,
to design and implement an audit that will provide reasonable assurance of the existence or lack
thereof of fraud. We as auditors must first determine the effectiveness and efficiency of a
companys internal controls, to determine whether the test basis will rely more on substantive
testing or tests of controls. We determined the audit risk based on industry statistics and the
nature of the Inventory account, as well as the level of materiality with respect to our audit. After
examining the Internal Controls and determining the audit risk for the engagement, we were able
to determine the nature, timing, and extent of the audit and developed an audit program. It is in
our opinion that our audit program will be able to provide reasonable assurance on the amounts
listed on Kimberly Clarks financial statements.
A companys Internal Controls are in place to provide reliance on the companys financial
statements and to ensure that the company will be able to detect and correct errors and fraud. It is
the responsibility of management to set up an Internal Control system that is both effective and
efficient. It is our responsibility as auditors to confirm that a companys Internal Controls are
established in such a way as to be able to detect frauds and misstatements.
It is our opinion that the financial statements of Kimberly Clark Corporation, and specifically the
Inventory account, is fairly presented, in all material aspects, in accordance with the U.S.
Generally Accepted Auditing Principles. It is also our opinion that the Internal Control of
Kimberly Clark Corporation is both effective and efficient with respect to the detection of fraud
and the reliability of their financial statements.

Martinez and Associates, LLP

Dallas, TX
February 1st, 2017

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Item 2:
Audit
Risk
Model

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Item 3: Inventory Cycle and Warehousing Cycle