Audit Plan for Hershey Foods Corporation

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					Hershey Foods Corporation
        Audit Plan


            Prepared by:
           Roger A. Caulk



ACCT 4150/01 – Auditing and Assurance
       Professor Richard Clune
      Kennesaw State University
         December 18, 2002
                                                Table of Contents

1. Memorandum to Professor Clune .......................................................................... 2

2. Engagement Letter .............................................................................................. 3

3. Company Overview .............................................................................................. 5

4. Industry Overview................................................................................................ 6

5. Top Management Team Outline ............................................................................ 8

6. Board and Audit Committee Outline ...................................................................... 9

7. Review of Prior Auditor Workpapers .................................................................... 13

8. Materiality Assessment ....................................................................................... 17

9. Four Audit Risk Areas ......................................................................................... 19

10. Proposed Audit Approach ................................................................................... 20

11. Proposed Engagement Staffing ........................................................................... 21

12. Proposed Timing of Audit Procedures .................................................................. 22

13. Audit Opinion ..................................................................................................... 23

14. Communication to Audit Committee .................................................................... 24

15. Exhibits:
           a. Annual Report for Fiscal Year Ended December 31, 2000
           b. Form 10-K for Fiscal Year Ended December 31, 2000




                                                                                                                        1
                                                                              Clune & Caulk, LLP
                                                                                1000 Chastain Road
                                                                              Kennesaw, GA 30144




                                       MEMORANDUM

                                                                        January 1, 2004




Professor Clune,

      Attached for your review is a draft audit plan for Hershey Foods Corporation as well as an
engagement letter for your signature.

                                                                        Sincerely,



                                                                        Roger A. Caulk




                                                                                                   2
                                         Clune & Caulk, LLP
                                          1000 Chastain Road
                                         Kennesaw, GA 30144



January 1, 2004

Mr. Richard H. Lenny
Chairman, President, and Chief Executive Officer
Hershey Foods Corporation
100 Crystal A Drive
PO Box 810
Hershey, PA 17033-0810

Dear Mr. Lenny:

Thank you for meeting with us to discuss the requirements of our forthcoming engagement. We will
audit the consolidated balance sheet of Hershey Foods Corporation as of December 31, 2003, and the
related consolidated statements of earnings, retained earnings, and cash flows for the year then ended.
Our audit will be made in accordance with generally accepted auditing standards and will include our
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
         The objective of our engagement is the completion of the foregoing audit and, upon its
completion and subject to its findings, the rendering of our report. As you know, the financial statements
are the responsibility of the management and board of directors of your company, who are primarily
responsible for the data and information set forth therein as well as for the maintenance of an
appropriate internal control structure (which includes adequate accounting records and procedures to
safeguard the company’s assets). Accordingly, as required by generally accepted auditing standards, our
procedures will include obtaining written confirmation from management concerning important
representations on which we will rely.
         Also as required by generally accepted auditing standards, we will plan and perform our audit to
obtain reasonable, but not absolute, assurance about whether the financial statements are free of
material misstatement. Accordingly, any such audit is not a guarantee of the accuracy of the financial
statements and is subject to the inherent risk that errors and irregularities (or illegal acts), if they exist,
might not be detected. If we become aware of any unusual matters during the course of our audit, we
will bring them to your attention. Should you then wish us to expand our normal auditing procedures, we
would be pleased to work with you to develop a separate engagement for that purpose.
         Our engagement will also include preparation of federal income tax returns for the corporation
for the year ended December 31, 2003, and a review of state income tax returns for the same period
prepared by your accounting staff.
         Our billings for the services set forth in this letter will be based upon our per diem rates for this
type of work plus out-of-pocket expenses; billings will be rendered at the beginning of each month on an
estimated basis and are payable upon receipt. This engagement includes only those services specifically
described in this letter, and appearances before judicial proceedings or government organizations, such
as the Internal Revenue Service, the Securities and Exchange Commission, or other regulatory bodies,
arising out of this engagement will be billed to you separately.
         We are enclosing an explanation of certain of our Firm’s Client Service Concepts. We have found
that such explanation helps communicate our commitment to the highest level of customer service.
         We look forward to providing the services described in this letter, as well as other services
agreeable to us both. In the unlikely event that any differences concerning our services or fees should
arise that are not resolved by mutual agreement, we both recognize that the matter will probably involve


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complex business or accounting issues that would be decided most equitably to both parties by a judge
hearing the evidence without a jury. Accordingly, you and we agree to waive any right to a trial by jury
in any action, proceeding, or counterclaim arising out of or relating to our services and fees.
        If you are in agreement with the terms of this letter, please sign one copy and return it for our
files. We appreciate the opportunity to work with you.

Very truly yours,



Clune & Caulk, LLP

Roger A. Caulk
Engagement Partner

Enclosure



        The foregoing letter fully describes our understanding and is accepted by us, HERSHEY
        FOODS CORPORATION.


______________________                                          ________________________________
        Date                                                              Richard H Lenny
                                                                    Chairman, President, and CEO




                                                                                                       4
                                          Company Overview

        Hershey Foods Corporation, primarily through its Hershey Chocolate U.S.A., Hershey
International and Hershey Canada Inc. units, produces and distributes a broad line of chocolate,
confectionery and grocery products. Financial results have strengthened over the past few years, driven
mainly by a rationalization of product lines that offered sub-par investment returns, the integration of a
number of complementary acquisitions, and an extraordinarily high rate of new product success.
        The company makes chocolate and confectionery products in various packaged forms and
markets them under more than 50 brands. Principal chocolate and confectionery products in the United
States are: Hershey's, Hershey's with almonds, and Cookies 'N' Mint bars; Hugs and Kisses (both also
with almonds) chocolates; Kit Kat wafer bars; Mr. Goodbar chocolate bars; Reese's Pieces candies; Rolo
caramels in milk chocolate; Skor toffee bars; Y&S Twizzlers licorice; and Amazin' Fruit gummy bears fruit
candy. HSY (Hershey Food Corporation’s stock ticker on the NYSE) significantly increased its participation
in the non-chocolate side of the confectionery industry through its late 1996 acquisition of Leaf North
America, whose major brands include Jolly Rancher, Whoppers, Milk Duds, and Good & Plenty. Grocery
products include Hershey's chocolate chips, cocoa and syrup; and Reese's peanut butter and peanut
butter chips.   Hershey's chocolate milk is produced and sold under license by independent dairies
throughout the United States, using a chocolate milk mix manufactured by HSY. The most significant raw
material used in the production of the company's chocolate and confectionery products is cocoa beans.
        In January 1999, Hershey completed the sale of 94% of its U.S. pasta business to New World
Pasta, for $450 million in cash. The transaction resulted in an after-tax gain of approximately $1.17 a
share in the 1999 first quarter. HSY had marketed its products on a regional basis under brand names
that included San Giorgio, Ronzoni, Skinner, P&R, Light 'n Fluffy and American Beauty.
        The company has various international arrangements, the investment in which changes from
time to time, but which in the aggregate are not material to HSY.
        In August 2001, the company announced a 7.9% increase in the dividend paid on the common
stock, marking the 27th consecutive annual increase.
        In December 2000, the company purchased the intense and breath freshener mints and gum
businesses of Nabisco for $135 million.    The acquired brands included Breath Savers mints, and Ice
Breakers, Carefree, Stickfree, Bubble Yum and Fruit Stripe gums. The businesses had 1999 sales of
approximately $270 million.
        In its April 15, 2002 issue, Fortune Magazine ranked Hershey Foods at number 362 in its 2002
edition of the Fortune 500, with the company boasting annual revenues in 2001 of approximately
$4,557.2 million. This rank was an increase from number 398 in the previous year.




                                                                                                        5
                                             Industry Overview1

        Consolidation is a primary theme throughout the Food and Beverage industry. Fewer and larger
suppliers are serving fewer and fewer producers. Food and Beverage inputs are being processed by a
smaller group of mega-sized global food companies, which sell through retail channels that are also in a
consolidation mode.
        All of this activity is driven by a global recognition of economies that can be derived by scaling
agricultural production, purchasing, technology, processing and merchandising.
        At the same time there is considerable niche activity developing within the industry with respect
to organic, natural, health and customized genetics areas that are spawning new industry participants
competing for customers within the Food and Beverage chain.
        While food companies such as Kraft, Unilever, Danone, PepsiCo, H.J. Heinz and Nestlé’s are
building stronger brands and expanding their category coverage, there is also increased activity in private
label manufacturing and growth in the industrial and food service sectors.
        Significant trends that are fundamental drivers for the Food and Beverage industry include:
1. Food safety and protection of the food supply.
        Food safety (especially after the September 11 terrorist attacks) has become a prime concern
among the consuming public. Safety concerns range from methods used to grow livestock and
vegetables to protecting against attacks on human health anywhere in the channels of food distribution.
At each step of the process, producers and processors are being challenged to improve methods and
procedures to ensure better quality food and beverage products. Governments are becoming
increasingly active in this area in an effort to promote consumer safety while establishing more rules and
regulations for industry operators.
2. Concentration in Distribution channels.
        This concentration has been progressing for some years now and the trend is expected to
continue. It is leading to both a smaller number of more integrated retail chains and a reducing number
of independent retailers. This is also true of wholesalers and food service firms. The most important
consequence is the shifting negotiation power from producers to retailers, thus provoking additional
concentration among food producers.
3. Technology advancements within the industry.
        Over the last decade food and beverage manufacturers have adopted new technologies and
processes to increase efficiencies in a slow growth environment. Computer technology and point-of-sale
systems have improved operator’s ability to manage inventory and replenish product in more efficient
fashion. Scan based trading is the next step in this evolution where the manufacturer will retain title to


1
 ―IMAP Focus Group Report, Food and Beverage, Spring 2002.‖ Retrieved December 14, 2002, from the
World Wide Web: http://www.imap.com/focusgroups/pdfs/foodandbeverage.pdf


                                                                                                             6
the product until it is purchased by the consumer. The retailer will be a merchandiser and deliver the
customer to the manufacturer.
        Similar technologies have revolutionized production processes allowing for more portion control
and segment packaging capabilities. Packaging, by itself, is undergoing technological advancement in the
areas of convenience and product safety. All of these technological advancements place increased
demands for capital investment on industry participants.
4. Growth in natural and health foods.
        While the Food and Beverage industry as a whole is quite stable, certain segments are showing
more rapid growth than others. In particular, there is faster growth in natural and organic food and
beverage products. People are increasingly more health conscious and looking to their diet to improve
and maintain their health. Such consumers are willing to pay more for health and natural products.
Higher margins are attracting more activity in this segment.
5. Convenience in food preparation.
        Households are struggling to find time to plan and prepare meals, as there are more two working
parents and active children. Convenient meals from fast foods to oven or microwave ready products are
growing rapidly as the consumer is seeking to minimize the amount of time invested in meal planning and
preparation for the family. Here again, the consumer is willing to pay more for such timesaving products.




                                                                                                          7
                                           Top Management Team Outline

         Executive Compensation for Year Ended December 31, 2000: 2

                   Kenneth L.      Michael F.      William F.     Robert M.        Raymond         P. N. Le
     Name                                                                                                         Jay F. Carr
                     Wolfe          Pasquale         Christ         Reese           Brace           Maire
                                  Executive VP    Executive VP    Senior VP,         VP,                         VP, Research
                                                                                                  President,
                  Chairman of      and Chief       and Chief       General        Conversion                      Services &
     Title                                                                                         Hershey
                   the Board       Operating       Operating     Counsel, and        and                            Special
                                                                                                 International
                                     Officer         Officer      Secretary      Procurement                      Operations
Salary                $775,000       $472,596        $335,000       $287,000        $258,000         $250,000        $236,500
Bonus                 $640,584       $298,397        $230,748       $166,056        $140,479         $140,407        $141,181
LTIP Payouts          $234,847         $86,125         $69,354       $41,404          $39,131         $26,845         $40,237
All Other*              $4,250          $4,250          $4,250         $4,250          $4,250          $4,250          $4,250
Total               $1,654,681       $861,368        $639,352       $498,710        $441,860         $421,502        $422,168

Stock Options**        154,650          30,300          16,850          11,000         11,450           7,750           8,850
         *This represents the Corporation’s matching contributions to the individual’s ESSIOP account for the year.
         **All stock options were issued with an exercise price of $45.00 per share.




         2
          ―Letter to Stockholders, Notice of 2001 Annual Meeting, and Proxy Statement: 2000 Annual Report to
         Stockholders.‖ Retrieved December 14, 2002, from the World Wide Web: http://www.edgar-
         online.com/bin/people/doc_frame.asp?first=RICHARD+H%2E&last=LENNY&fname=0001053949%2D01
         %2D500005&qlastname=LENNY&qfirstname=RICHARD+H%2E&qftype=ALL&qcompname=&qcik=&sear
         chpage=%2Fbrand%2Fyahoo%2Fpeople%2Fdefault%2Easp&nad=0


                                                                                                                 8
                                   Board and Audit Committee Outline

The Board has four standing committees: the Audit Committee; the Committee on Directors and
Corporate Governance; the Compensation and Executive Organization Committee; and the Executive
Committee. In addition to the four standing committees, the Board from time to time establishes
committees of limited duration for special purposes.3


Audit Committee:
     5 meetings in 2000
     Members:
      o   John C. Jamison (Chair)
      o   William H. Alexander
      o   Allan Z. Loren (until his resignation from the Board on September 30, 2000)
      o   Mackey J. McDonald
     Responsibilities:
      o   Assists the full Board
             In its oversight of the Corporation's accounting and financial reporting principles and policies
              and internal controls and procedures;
             In its oversight of the Corporation's financial statements and the independent audit thereof;
             In selecting (or nominating the independent auditors to be proposed for stockholder
              approval), evaluating and, where deemed appropriate, replacing the independent auditors;
              and
             In evaluating the independence of the independent auditors.


Committee on Directors and Corporate Governance:
     6 meetings in 2000
     Members:
      o   John M. Pietruski (Chair)
      o   William H. Alexander
      o   Bonnie G. Hill
      o   Kenneth L. Wolfe
     Responsibilities:
      o   Reviews and makes recommendations on the composition of the Board and its committees;
      o   Evaluates and recommends candidates for election to the Board;
      o   Administers the Directors' Compensation Plan; and

3
    ―Letter to Stockholders…‖


                                                                                                              9
    o   Reviews and makes recommendations to the full Board on corporate governance matters and the
        Board's corporate governance policies.


Compensation and Executive Organization Committee:
   6 meetings in 2000
   Members:
    o   Robert H. Campbell (Chair)
    o   C. McCollister Evarts, M.D.
    o   John C. Jamison
    o   Mackey J. McDonald
   Responsibilities:
    o   Establishes the salaries of the Corporation's elected officers;
    o   Grants performance stock units, stock options and other rights under the Corporation's Key
        Employee Incentive Plan ("Incentive Plan");
    o   Establishes target-award levels and makes awards under the Annual Incentive Program and the
        Long-Term Incentive Program of the Incentive Plan;
    o   Administers the Incentive Plan, the Employee Benefits Protection Plans and the Supplemental
        Executive Retirement Plan;
    o   Monitors compensation arrangements for management employees for consistency with corporate
        objectives and stockholders' interests;
    o   Reviews the executive organization of the Corporation; and
    o   Monitors the development of personnel available to fill key management positions as part of the
        succession planning process.


Executive Committee:
   8 meetings in 2000
   Members:
    o   Kenneth L. Wolfe (Chair)
    o   Richard H. Lenny (as of March 12, 2001)
   Responsibilities:
    o   Reviews and recommends to the full Board for approval major capital projects and expenditures;
        and
    o   Oversees the administration of and revisions to the Corporation's retirement and welfare benefit
        plans, including the pension plans covered by the Employee Retirement Income Security Act of
        1974.




                                                                                                       10
Board and Management Changes4
        We are very pleased that Richard H. Lenny joined the Corporation as President and Chief
Executive Officer and became a member of the Hershey Foods Board, effective March 12, 2001. I will
remain Chairman of the Board during a transitional period not to exceed one year, at which time Mr.
Lenny will add the Chairman position to his title. Mr. Lenny is joining us after heading up Kraft Foods’
Nabisco Biscuit and Snack business, which includes such brands as Oreo, Chips Ahoy!, Ritz, Planters and
Life Savers. He is an accomplished executive with a 24-year career in packaged goods and has a strong
track record of building brands and people. His enormous record of success will be a tremendous asset to
Hershey Foods. I am confident our stockholders and employees can look to a bright future as he assumes
the leadership of our Corporation. The election of Mr. Lenny was the culmination of a planned succession
process and a search by the Board of Directors for my successor as I approached the normal retirement
age for Hershey executives.
        William H. Alexander, who has been a director since 1995, will step down from the Board at the
2001 Annual Meeting of Stockholders in accordance with the policies of Hershey Trust Company and
Milton Hershey School regarding service on the Board. The Corporation has benefited greatly from Mr.
Alexander’s judgment and sound business insight during his time on the Board, and we thank him for his
contributions to the Corporation. Effective September 20, 2000, Allan Z. Loren, Chairman and Chief
Executive Officer of The Dun & Bradstreet Corporation, resigned from the Board due to scheduling
conflicts with our meeting dates. We also thank him for his service on the Board.
        We look forward to J. Robert Hillier joining the Board following the 2001 Annual Meeting of
Stockholders. He is a successful entrepreneur, having founded and built The Hillier Group into one of the
leading architectural firms in the United States. Mr. Hillier also serves on the boards of Hershey Trust
Company and Milton Hershey School and is Chair of the Milton Hershey School Trust’s Investment
Committee.
        On December 11, 2000, William F. Christ, formerly Senior Vice President, Chief Financial Officer
and Treasurer, was named Executive Vice President and Chief Operating Officer, with responsibility for
the Corporation’s confectionery, grocery and international businesses, operations and manufacturing
shared services, and research and development activities. A 31-year veteran of Hershey Foods, he brings
solid leadership skills, as well as broad experience and in-depth knowledge of Hershey’s businesses, to
the task of leading Hershey forward.
        Mr. Christ succeeds Michael F. Pasquale, who resigned as an officer and director of the
Corporation in December. Mr. Pasquale had served Hershey Foods very well in a variety of capacities for
22 years and made many excellent contributions to the Corporation’s growth and strategic direction.



4
 Wolfe, Kenneth L. Hershey Foods Corporation Annual Report: Letter to the Stockholders. March 15,
2001, pp. 3-4.


                                                                                                           11
        Concurrently, Frank Cerminara, formerly Vice President, Procurement, was named Vice President,
Chief Financial Officer and Treasurer, succeeding Mr. Christ. A 28-year veteran of Hershey Foods, Mr.
Cerminara has held a variety of positions in finance, marketing, commodity procurement, and order
fulfillment. He has a solid grounding in finance, as well as an extensive background in operational areas
of critical importance to the Corporation.
        George F. Davis was named Vice President and Chief Information Officer, effective January 1,
2001. He is responsible for the Corporation’s Information Technology Integration Group, e-business/e-
commerce and electronic data interchange activities. He comes to Hershey from Computer Services
Corporation where he served as Vice President–Global Infrastructure Services.




                                                                                                        12
                                 Review of Prior Audit Workpapers

   Predecessor Auditor: Arthur Andersen LLP
   Successor Auditor: Clune & Caulk LLP
   Time Period of Prior Audit: For Year Ended December 31, 2002
   Points to be covered in the review of prior audit workpapers:
    o   Any instances of fraud, illegal acts, or lacking internal control procedures
    o   Nature, timing, and extent of prior audit
    o   Reasons for change in auditor
    o   Any prior actions taken by the SEC
    o   General reputation of the firm and integrity of management
    o   Previous interactions by the predecessor auditor with the firm
   There were no significant findings during the review of the prior audit.




                                                                                       13
                                        Letter to Prior Auditor:


                                        Clune & Caulk LLP
                                        1000 Chastain Road
                                       Kennesaw, GA 30144



December 15, 2003

Arthur Andersen, LLP
New York, NY 10001

Dear Sirs:

This letter is to ask for your consent to allow our firm, as successor independent auditors for Hershey
Foods Corporation, access to your working papers for your audit of the December 31, 2002 financial
statements of Hershey Foods Corporation. By giving your consent, you agree that our review of your
working papers is undertaken solely for the purpose of obtaining an understanding about Hershey Foods
Corporation and certain information about your audit to assist us in planning the audit for the December
31, 2003 financial statements of Hershey Foods Corporation.

Please confirm your agreement with the foregoing by signing and dating a copy of this letter and
returning it to us.

Very truly yours,



Roger A. Caulk
Engagement Partner
Clune & Caulk LLP


Accepted:
Arthur Andersen, LLP
By: ______________________ Date: ___________________




                                                                                                     14
                                       Letter from Prior Auditor:


                                     Arthur Andersen, LLP
                                      New York, NY 10001



December 20, 2003

Roger A. Caulk
Clune & Caulk LLP
1000 Chastain Road
Kennesaw, GA 30144

Dear Mr. Caulk:

We have previously audited, in accordance with generally accepted auditing standards, the December 31,
2002 financial statements of Hershey Foods Corporation. We rendered a report on those financial
statements and have not performed any audit procedures subsequent to the audit report date. In
connection with your audit of Hershey Foods Corporation’s December 31, 2003 financial statements, you
have requested access to our working papers prepared in connection with that audit. Hershey Foods
Corporation has authorized our firm to allow you to review those working papers.

Our audit, and the working papers prepared in connection therewith, of Hershey Foods Corporation’s
financial statements were not planned or conducted in contemplation of your review. Therefore, items of
possible interest to you may not have been specifically addressed. Our use of professional judgment and
the assessment of audit risk and materiality for the purpose of our audit mean that matters may have
existed that would have been assessed differently by you. We make no representation as to the
sufficiency or appropriateness of the information in our working papers for your purposes.

We understand that the purpose of your review is to obtain information about Hershey Foods Corporation
and our 2002 audit results to assist you in planning your 2003 audit. For that purpose only, we will
provide you access to our working papers that relate to that objective.

Upon request, we will provide copies of those working papers that provide factual information about
Hershey Foods Corporation. You agree to subject any such copies or information otherwise derived from
our working papers to your normal policy for retention of working papers and protection of confidential
information. Furthermore, in the event of a third-party request for access to your working papers
prepared in connection with your audits of Hershey Foods Corporation, you agree to obtain our
permission before voluntarily allowing any such access to our working papers or information otherwise
derived from our working papers, and to obtain on our behalf any releases that you obtain from such
third party. You agree to advise us promptly and provide us a copy of any of our working papers or
information otherwise derived therefrom.

Because your review of our working papers is undertaken solely for the purpose described above and
may not entail a review of all our working papers, you agree that (1) the information obtained from the
review will not be used by you for any other purpose, (2) you will not comment, orally or in writing, to
anyone as a result of that review as to whether our audit was performed in accordance with generally
accepted auditing standards, (3) you will not provide expert testimony or litigation support services or
otherwise accept an engagement to comment on issues relating to the quality of our audits, and (4) you
will not use the audit procedures or results thereof documented in our working papers as evidential




                                                                                                     15
matter in rendering your opinion on the 2003 financial statements of Hershey Foods Corporation, except
as contemplated in Statement on Auditing Standards No. 84.

Please confirm your agreement with the foregoing by signing and dating a copy of this letter and
returning it to us.

Very truly yours,
Arthur Andersen, LLP


Accepted:
Clune & Caulk LLP
By: ______________________ Date: ___________________




                                                                                                   16
                                       Materiality Assessment

        The FASB, in FASB 2, defines materiality as the ―magnitude of an omission or misstatement of
accounting information that, in light of surrounding circumstances, makes it probable that the judgment
of a reasonable person relying on the information would have been changed or influenced by the
omission or misstatement.‖
        Below are my assessments of materiality in the financial statements of Hershey Foods
Corporation, measured both quantitatively and qualitatively.




Quantitative Materiality:
        To assess materiality in the quantitative sense, I would choose one of the following two
mathematical guidelines against which I would compare account balances: 5% of net income, or the
amount that would cause EPS to move in either direction by one cent, whichever is more. Applied to the
financial statements of Hershey Foods Corporation, those figures would be as follows:
   5% of net income = .05 * $334,543,000 = $16,727,150
   Net Income = $334,543,000
    Basic EPS = $2.44 = Net Income = / Weighted Average Shares Outstanding
    Weighted Average Shares Outstanding = 137,107,787
    If Basic EPS were $2.45, Net Income would be $335,914,078 ($2.45 = $335,914,078 / 137,107,787)
    Material Amount = $335,914,078 - $334,543,000 = $1,371,078




Qualitative Materiality:
        Apart from those factors that can be quantified, materiality should be considered from those
factors that are qualitative only. Below are some of those qualitative factors that should be considered
over the course of this audit:
   Overall materiality in the audit is just as important as individual materiality in account balances.
    Although any one account examined may be misstated by less than the material amount above, the
    sum of all misstatements may be more than this amount. If it is found that a significant number of
    misstatements in account balances are close to this number, then this figure should be reevaluated
    and possibly lowered.
   On a related note, a misstatement could occur with a matching negative misstatement, with the net
    effect being zero. For example, Advertising Expense of $10 million could be recorded accidentally as
    Prepaid Advertising. The result of this error would be that Advertising Expense would be overstated
    and Rent Expense would be overstated by the same amount. Also, net income would be understated



                                                                                                     17
    (due to the overstated expense) and net assets would be overstated (due to the overstated prepaid
    asset). Since this $10 million error would fall under the umbrella of quantitative materiality discussed
    above, it could go uncorrected. Errors such as these should be sought out and corrected over the
    course of this audit.
   If a transaction results in an error and another transaction is due to fraudulent activity, the fraudulent
    transaction is more material, even if these two transactions deal with the same dollar amount.
   Trends from year to year are also important in examining materiality. A material misstatement could
    have occurred, for example, if Cost of Sales decreased from 85% of net sales in the two previous
    years to 55% in the current year. As such, horizontal analysis of the financial statements should be
    closely examined.
   Hershey Foods Corporation does not appear to be in any trouble, as it has made a net profit for each
    of the last three years and has shown a continuous record of success in its industry. As such, I don’t
    think that there would be much environment risk related to this audit. Therefore, the quantitative
    guidelines stated above can be applied more liberally than they otherwise would if Hershey were
    facing financial difficulties.




        Upon considering the quantitative and qualitative factors above as they relate to materiality in
this audit, I suggest that any misstatement above approximately $16,000,000 be considered material,
and any misstatement less than $16,000,000 be considered a tolerable misstatement.                To do any
extensive substantive testing on a misstatement below this amount would produce more costs to the
audit than any benefits gained.      This is only a starting point, and I anticipate that as the audit
progresses, the qualitative conditions related to materiality will further guide and shape the audit.




                                                                                                           18
                                          Four Audit Risk Areas

         Upon initial review of the financial statements of Hershey Foods Corporation for the year ended
December 31, 2003, I anticipate that the following four areas will be of the most significant risk to our
audit.


General Overstatements in the Financial Statements : In the year reported, Hershey Foods Corporation is
looking to sell their net assets to potential buyers, including Nestlé. In the pursuit of making the sale to a
potential buyer, there may have been an incentive for Hershey Foods Corporation to overstate their
financial position and activities in an attempt to make the company ―look better off‖ than it actually is. As
such, the financial statements should be examined carefully to head off any attempt at fraudulent
reporting in account balances.


Inventory:    With any company that sells products (as opposed to services), the potential for
misstatement of inventory exists. For Hershey Foods Company, it is particularly important to survey the
physical counting of the inventory to verify its existence and to determine if its method of inventory
valuation is appropriate.


Compliance With Federal Regulations: Since Hershey Foods Corporation sells goods that are perishable,
our audit should include an examination of whether or not the company complies with regulations set
forth by federal agencies, such as the Food and Drug Administration.              Noncompliance with such
regulations could subject the company to risk related to contingent liabilities due to lawsuits from
consumers.


Financial Instruments       Hershey Foods Corporation is a multinational corporation, and as such it is
exposed to risk related to changes exchange rates and related hedging activities. Examining whether or
not international transactions are valued properly and whether or not they are properly disclosed in the
financial statements should mitigate these risks.




                                                                                                           19
                                       Proposed Audit Approach

        The following points outline how I would suggest testing the 2003 financial statements for
material misstatements to meet assertions made by management.


General Overstatements in the Financial Statements: The assertion of valuation in all account balances
can be determined through selecting a sample of account balances in the financial statements and
performing direct testing on those balances. The disclosure assertion can be met by making sure that all
necessary disclosures are present, informative, and adequate to make sure that readers of the financial
statements have sufficient information to make their decisions.


Inventory: Staff auditors located in the Hershey, PA office should observe Hershey employees as the
physical inventory count is made to test the existence assertion. If count has already occurred by the
time the engagement begins, these auditors can review the paperwork related to the inventory count.
Also, any adjustments that are entered into the system to update inventory accounts should be
monitored. During the engagement period, any receipt of inventory should be observed, including the
count of goods when received in the warehouse and the subsequent data entry into the system, which
can suggest if inventory receipts are usually recorded properly. All of these steps above are to test the
assertion of valuation of the inventory.


Compliance with Federal Regulations: The completeness assertion should be tested by making sure that
all potential liabilities associated with noncompliance lawsuits are recorded. US GAAP requires that all
contingent liabilities are to be recorded when they are probable and reasonably estimable. Whether or
not such liabilities are probable and their estimated amount are judgment calls, so it is necessary to
examine all evidence related to such acts of noncompliance.         This evidence could consist of court
documents and grievances that are filed with the FDA and other regulatory agencies.           This type of
examination to determine the estimated amount of such contingent liabilities may also meet the valuation
assertion.


Financial Instruments: The valuation assertion made by management should be tested by making sure
that all international transactions are accounted for properly. This could be done through examining
exchange rates on transaction dates to check the calculations made in a sampling of such transactions.
Such sources of exchange rate information include The Wall Street Journal and oanda.com.                The
presentation and disclosure assertions should be addressed through examining the disclosures set forth
in the financial statements relative to financial instruments assuring that they are accurate and complete.




                                                                                                        20
                                   Proposed Engagement Staffing

   Staff Auditors (from Kennesaw, GA and Hershey, PA offices)
    o   Able to perform substantive testing on account balances.
    o   Able to observe year-end inventory account (this is for the auditors in the Hershey, PA office—
        more cost efficient to have local auditors, because of their proximity to Hershey’s warehouse).
   Senior Auditors
    o   Also able to perform substantive testing on account balances (those that are somewhat more
        complex and require deeper analysis).
    o   Communicate with audit managers on progress of engagement.
    o   Can serve as first-line supervisors to staff auditors:
           Answer general questions
           Make assignments of duties and tasks
           Sign off on tasks and paperwork completed
   Audit Managers
    o   Ensure that all auditors involved in engagement are qualified and independent from client
    o   Serve as supervisors to audit seniors
   Engagement Partner
    o   Serve as primary contact with client (board of directors, management, and audit committee)
    o   Sign off on all paperwork submitted to the SEC, including the audit opinion
   IT Specialist
    o   Able to quickly gain familiarity with Hershey’s information system to aid in substantive testing of
        account balances
    o   Can gauge appropriateness of system controls to help auditors understand the level of audit risk
        that is present
   Member of Legal Counsel
    o   Has familiarity with federal regulations to help in contingency testing described above
   International Auditor
    o   Can use expertise in international accounting to assess risk and material misstatements
        associated with international financial instruments
   Tax Specialist
    o   Can verify that tax accruals were accounted for properly
    o   Can possible help senior management at Hershey with tax planning issues for the coming year, if
        this causes no issues with independence




                                                                                                          21
                               Proposed Timing of Audit Procedures

   February 2003 – April 2003 (20% of audit work)
    o   Have preliminary discussions with management and audit committee of Hershey Foods
        Corporation.
    o   Obtain general information about the Food and Beverage industry (financial ratios, technological
        developments, any areas that could lead to audit risk, etc).
    o   Obtain consent from predecessor auditor (Arthur Andersen, LLP) to have access to workpapers
        from 2002 audit.
    o   Review prior workpapers for general information related to the company.
    o   Write engagement letter to Hershey Foods Corporation.
   May 2003 – July 2003 (30% of audit work)
    o   Determine staffing needs for engagement.
    o   Perform substantive testing on account balances to find material misstatements.
    o   Test information system controls to see if there is a lack of controls that could lead to material
        misstatements.
    o   Communicate with client on progress of engagement.
   August 2003 – October 2003 (30% of audit work)
    o   Continue substantive testing begun in previous period.
    o   Obtain confirmations of account balances from vendors and customers.
    o   Communicate with client on progress of engagement.
    o   Adjust staffing as needed to ensure that the engagement will be completed by the January 26,
        2004 deadline.
   November 2003 – January 2004 (20% of audit work)
    o   At end of November, do additional substantive testing on account balances that are deemed to
        have a high risk and assess other accounts for accuracy, including cash.
    o   Observe physical year-end count of inventory.
    o   Sign the audit opinion on January 26, 2004.




                                                                                                             22
                                             Audit Opinion

To the Shareholders and Board of Directors of Hershey Foods Corporation:

         We have audited, in accordance with auditing standards generally accepted in the United States,
the accompanying consolidated balance sheet of Hershey Foods Corporation (a Delaware Corporation)
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income,
retained earnings, and cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the management of the company. Our responsibility
is to express an opinion on these financial statements based on our audit.
         We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing accounting principles used and significant estimates made by
management, as well as evaluating the financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
         In our opinion, the financial statements referred to above present fairly, in all material aspects,
the financial position of Hershey Foods Corporation and subsidiaries as of December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the three years ended December 31,
2003, in conformity with accounting principles generally accepted in the United States of America.

January 26, 2004
Atlanta, GA
Clune & Caulk LLP




                                                                                                        23
                               Communication to Audit Committee

To the Audit Committee of Hershey Foods Corporation:

         We have audited, in accordance with auditing standards generally accepted in the United States,
the accompanying consolidated balance sheet of Hershey Foods Corporation and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated statements of income, retained earnings, and
cash flows for each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the management of the company. Our responsibility is to express an
opinion on these financial statements based on our audit.
         Some of the items that were addressed by our firm and the executive management team at
Hershey Foods Corporation during the course of our audit are listed and summarized below:
     Management was conservative in making sensitive accounting estimates and we had no
         concerns about those processes or their results.
     There were no misstatements in the financial statements so material that they required
         an adjustment by management.
     There were no major accounting or reporting disagreements with management over the
         representation of the financial statements.
     To our knowledge, there was no discussion from management with other public
         accounting firms regarding the treatment of potentially controversial accounting issues.
     The audit proceeded well according to our planning and no significant difficulties
         occurred during our engagement.
     There were no findings of fraudulent or illegal activities during the course of our
         engagement.
     Internal controls present at Hershey Foods Corporation were adequate and sufficient
         enough to ensure that no material misstatements occurred in the financial statements.
     There were no issues related to independence with anyone from our firm that worked on
         the engagement. We hereby affirm that we conducted the audit with complete
         independence from Hershey Foods Corporation.
         As a result of our audit, we had no significant difficulties or problems with management, from
whom our auditors worked independently. On the whole, we feel that this was a successful audit and
that it went well according to our prior planning.

January 26, 2004
Atlanta, GA
Clune & Caulk LLP




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