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Obtaining an Understanding of the

Client and Its Environment

Jeffrey Camiguing
Junbert Salido
BillyDos Mamainte III
Mohammad Guiling
Jasson Ringo Ario

In order for us, as auditors, to obtain sufficient understanding of our client, Pepsi Company,
and its environment we must obtain knowledge about our entitys:
PepsiCo is in the Food & Beverages market. This industry is saturated with huge no of
players operating in it. In the soft drink industry the entry of new competitors depends on the
barriers to entry that are present, and also the reaction from existing competitors that the
entrant can expect. Industry analysts are projecting that the soft drink industry will grow by
almost 4% over the next five years.
Although there are numerous substitutes and alternatives, the savory snack and soft
drink industry is going to be a large part of our economy for many more decades. Companies
need to know these factors if they intend to operate with a competitive advantage in this
industry, especially at a time when the economy is slumping. Major forces affecting the
industry are economies of scale and barrier to entry.
Political Influence
The production distribution and use of many of PepsiCo product are subject to various
Indian laws, such as the Food, Drug and Cosmetic Act, the Occupational Safety and
Health Act.
The various businesses of Pepsi are also subject to state, local and foreign laws. The
international businesses are subject to the Government stability in the countries where
PepsiCo is trying get into (underdeveloped markets).
The Indian, state, local and foreign environmental laws and regulations. The businesses
are also subject to de taxation policy in each country they are operating. They also have
to comply with Indian, state, local and foreign environmental laws and regulations.

(As amended, effective March 14, 2013)
Independent Auditors
1. Appoint, compensate, retain, oversee the work of and terminate the Corporations independent auditors
(taking into account the vote on shareholder ratification), which shall report directly to the Committee.

2. Exercise the Committees sole authority to approve all audit engagement fees and terms as well as
permissible non-audit engagements with the independent auditors.
3. At least annually, consider the independence of the independent auditors, and obtain and review a
report from such independent auditors describing (to assess the auditors independence) all relationships
between the independent auditors and the Corporation or individuals in financial reporting oversight roles
at the Corporation, that may reasonably be thought to bear on the independent auditors independence,
and discuss with them the potential effects of any such relationships on independence.
4. At least annually, obtain and review a report by the independent auditors describing: the firms internal
quality-control procedures; and any material issues raised by the most recent internal quality-control
review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or more independent audits carried out by the
firm, and any steps taken to deal with any such issues.
5. Review the audit plans and activities of the independent auditors and the coordination of their audit

6. Review and discuss with the independent auditors any audit problems or difficulties and managements
7. Establish and maintain hiring policies for employees or former employees of independent auditors.

Financial Reporting and Disclosure

8. Meet with management and the independent auditors to review and discuss the Corporations annual
and quarterly financial statements, including management judgments and accounting estimates,
significant new accounting policies, significant changes in accounting principles or their application,
reviewing the Corporations specific disclosures under Managements Discussion and Analysis of
Financial Condition and Results of Operations and managements certification of such statements.
9. Review regularly the independent auditors report submitted to the Committee regarding the
Corporations critical accounting policies and practices, alternative treatments of financial information that
have been discussed with management, and written communications between the Corporations
management and the independent auditors.

10. Review with the independent auditors their reports on the annual and quarterly financial statements;
discuss with the independent auditors and management their judgment as to the quality of the
Corporations accounting policies, including the application of the Corporations accounting policies; and
review and discuss with the independent auditors all other matters required to be communicated by the
independent auditor to the Committee, including under Auditing Standard No. 16, as adopted by the
Public Company Accounting Oversight Board.

11. Review and discuss earnings press releases, and review and discuss on a general basis the types of
information disclosed in, and the types of presentations to be made for, earnings press releases, as well
as financial information or earnings guidance provided to analysts and ratings agencies.
12. Review with management, the independent auditors and the senior-most Internal Auditor, the
adequacy of the Corporations internal controls, disclosure processes and

13. Based on the Committees review and discussion, recommend to the Board that the annual financial
statements be included in the Corporations Annual Report on Form 10-K.
14. Assist the Boards oversight of the Corporations compliance with respect to its financial reporting and
disclosure processes, disclosure requirements and internal control systems. Review (A) major issues
regarding accounting principles and financial statement presentations, including any significant changes
in the Corporations selection or application of accounting principles, and major issues as to the adequacy
of the Corporations internal controls and any special audit steps adopted in light of material control
deficiencies; (B) analyses prepared by management and/or the independent auditors setting forth
significant financial reporting issues and judgments made in connection with the preparation of the
financial statements, including analyses of the effects of alternative GAAP methods on the financial
statements; and (C) the effect of regulatory and accounting initiatives, as well as off-balance sheet
structures, on the financial statements of the Corporation.

Policy for Audit, Audit-Related and Non-Audit Services

To ensure objective auditing of our financial statements, PepsiCo has adopted specific guidelines
regarding non-audit and tax services provided by an independent auditor.

PepsiCo policy with respect to the engagement of its Independent Auditor ("Auditor") to perform
Audit, Audit Related, Tax and Other Non-Audit Services for PepsiCo and its consolidated subsidiaries.

PepsiCo and its Audit Committee are committed to ensuring the independence of the Auditor,
both in appearance as well as in fact. Accordingly, significant attention is directed toward the
appropriateness of the Auditor to perform services other than the audit. The following policy and
guidelines have been adopted in this regard.

Statement of Policy

The Audit Committee will engage the Auditor for the audit of PepsiCo's consolidated financial
statements, and other audit-related work as defined in this policy. The Auditor may only be engaged for
Tax and other non-audit related work if those services enhance and support the attest function of the
audit, or are an extension to the audit or audit related services .Annually the Global Lead Audit Partner
will review with the Audit Committee the services the Auditor expects to provide in the coming year and
the related fees. In addition, PepsiCo will provide the Audit Committee with a quarterly status for the
Committee's pre-approval of any audit related, tax or other non-audit services that the Auditor has been
asked to provide or may be asked to provide in the following quarter.

PepsiCo is a leading global beverage, snack and Food Company. They manufacture or
use contract manufacturers, market and sell a variety of salty, convenient, sweet and grain-
based snacks, carbonated and non-carbonated beverages and foods in approximately 200
countries, with its largest operations in North America (United States and Canada), Mexico and
the United Kingdom. PepsiCos commitment to sustainable growth, defined as Performance
with Purpose, is focused on generating healthy financial returns while giving back to the
communities it serves. This includes meeting consumer needs for a spectrum of convenient
foods and beverages, reducing its impact on the environment through water, energy and
packaging initiatives, and supporting its employees through a diverse and inclusive culture that
recruits and retains world-class talent.

Their products are consumed over one billion times each day all over the world. The company
have 22 billion dollar brands and over forty 250 million - 1 billion dollar brands in estimated annual retail
sales. It have increased its annual dividend for 41 consecutive years and delivered cumulative cash
returns of $53 billion over a ten year period.


These policies may require management to make difficult and subjective judgments regarding
uncertainties, and as a result, such estimates may significantly impact Companys financial results. The
precision of these estimates and the likelihood of future changes depend on a number of underlying
variables and a range of possible outcomes. PepsiCos critical accounting policies arise in conjunction
with the Following:
Revenue recognition,
Brand and goodwill valuations,
Income tax expense and accruals
Revenue Recognition
PepsiCos products are sold for cash or on credit terms. The credit terms, which are established
in accordance with local and industry practices, typically require payment within 30 to 90 days
internationally, and may allow discounts for early payment. It recognizes revenue upon shipment or
delivery to its customers based on written sales terms that do not allow for a right of return. However,
its policy for DSD and chilled products is to remove and replace damaged and out-of-date products from
store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly,

its policy for certain warehouse-distributed products is to replace damaged and out-of-date products.
Based on the companys experience with this practice, it has reserved for anticipated damaged and out-
of-date products

Brand and Goodwill Valuations
PepsiCo sells products under a number of brand names, many of which were developed by PepsiCo. The
brand development costs are expensed as incurred. There are other brands that PepsiCo has acquired.
Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including
brands, based on estimated fair value, with any remaining purchase price recorded as goodwill.
Determining fair value requires significant estimates and assumptions based on an evaluation
of a number of factors, such as

marketplace participants
product life cycles
market share
consumer awareness
brand history and future expansion expectations
amount and timing of future cash flows
the discount rate applied to the cash flows.

The company believes that a brand has an indefinite life if it has a history of strong revenue
and cash flow performance, and we have the intent and ability to support the brand with
marketplace spending for the foreseeable future. If these perpetual brand criteria are not met,
brands are amortized over their expected useful lives, which generally range from five to 40

Income Tax Expense and Accruals

The annual tax rate is based on companys income, statutory tax rates and tax planning
opportunities available in the various jurisdictions in which the company operates. Significant
judgment is required in determining annual tax rate and in evaluating tax position. Deferred tax
liabilities generally represent tax expense recognized in financial statements for which payment
has been deferred, or expense for which the company has already taken a deduction in tax
return but have not yet recognized as expense in the financial statements. In 2008, the annual
tax rate was 26.8% compared to 25.9% in 2007.The tax rate in 2008 increased 0.9 percentage
points primarily due to the absence of the tax benefits recognized in the prior year related to
the favorable resolution of certain foreign tax matters, partially offset by lower taxes on foreign
results in the current year.


Knowledge of the clients business and industry as well as its accounting policies are
essential if the audit is to be carried out effectively and efficiently. The auditor should obtain a
sufficient level of knowledge of the entitys business to identify and understand the events,
transactions and practices that may have a significant effect on the financial statements.

As to the accounting policies of the PepsiCo, the auditor should have a wide knowledge
and understanding for this matter since the company is using this critical accounting policies
which requires a significant judgment of the management and might also have a significant
effect on the audit process. Some of the companys accounting policies are based on their
managements assumptions that would possibly have an effect on its financial statement. And
by this, the auditor should be able to evaluate the reasonableness of the clients estimate in
order for him to design appropriate audit procedures.

PepsiCo's company objectives are based on one question: "What exactly is it that enables the
best consumer product companies to grow year in and year out?" Market positioning is one of the most
important aspects of PepsiCo success. It has been a leader and gaining market share in each of its core
businesses and strives to continue in recognizing under-marketed target regions throughout the world
to continually gain market share from its competitors. The second aspect of PepsiCo's objectives deals
with continuing is strong well- recognized consumer brand name domestically and internationally.
Third the company strives to recognize good growth prospects and opportunities for new and
alternative product development within each of its core businesses. PepsiCo's fourth objective is to
globally diversify its portfolio. Finally, the last objective of PepsiCo is to be more productive and efficient
through the competitive advantages of its product innovation capabilities, the company's streamlined
patented manufacturing process, and the vast scale of the manufacturing and distribution system.
Business Strategies
1.) International market expansion strategy through mergers and acquisitions
- Mergers and acquisitions can offer the advantages of gaining access to competencies and
infrastructure, reducing direct costs and overheads and achieving organic growth.
Recently, PepsiCo has engaged in important mergers and acquisitions such as acquisition of juice and
diary businesses Lebedyansky and Wimm-Bill-Dann in Russia, Lucky snacks and Mabel cookies in Brazil,
and Dilexis cookies in Argentina.

2.) Formation of strategic alliances in global scale
- Specifically, strategic partnerships have been formed with Tingyi in China in order to claim a share in
growing beverage market in China. Moreover, formation of a joint-venture with Tata in India to enhance
drinking water manufacturing capabilities, and initiation of strategic partnership with Almarai in Saudi
Arabia can be mentioned to illustrate PepsiCos adoption of strategic alliances as an integral part of the
corporate strategy.
Important strategic alliances are formed by PepsiCo at home markets as well. Specifically, by forming a
strategic alliance with Starbucks a global coffee house chain, PepsiCo has been able to claim its share
from increasing energy drink market segment.

3.) Focus on emerging markets
- The share of net revenues from developing and emerging markets such as China, India, and Russia have
been increased from 24% in 2006 to 35% in 2012 (Annual Report, 2012) through mergers and
acquisitions as discussed above, as well as, on the basis of formation of direct subsidiaries. Moreover,
PepsiCo CEO Indra Nooyi has publicly expressed commitments to further increase the level of presence
of the company in emerging markets.
4.) Focus on organisational culture
- Organisational culture can be defined as the collection of words, actions, thoughts, and stuff that
clarifies and reinforces what a company truly values and the nature of organisational culture directly
impacts its performance in short-term and long-term perspectives.
PepsiCo CEO Indra Nooyi is widely believed to be an unconventional corporate leader for a good reason.
It has been noted that shes been known to walk the halls at Pepsi barefoot, sometimes even singing
along the way (Sheetz-Runkle, 2010, p.112) and this fact communicates her willingness to embrace her
differences with positive implications on employee morale and organisational culture.
5.) Focus on increasing core organic revenue
- Core organic revenue can be explained as a type of revenue that is achieved through increasing the
volume of production and sales. PepsiCo core organic revenues were increased by 5% during 2012
(Annual Report, 2012) and the company strategic level management is committed to further increase
the levels of core organic revenues through maintaining high quality standards and applying effective
marketing strategy.
As an international and widely popular corporation, Pepsi has many risks as a business but only some
are notable for the purpose of material misstatements for the audit:

Demand for Pepsi products may be adversely affected by changes in consumer preferences and
tastes or if it will unable to innovate or market their products effectively.
Financial performance could suffer if the company will be unable to compete effectively.
Any damage to the reputation could have a material adverse effect on the companys business,
financial condition and results of operations.
Trade consolidation or the loss of any key customer could adversely affect financial
A portion of the workforce belongs to unions. Failure to successfully renew collective bargaining
agreements, or strikes or work stoppages could cause the business to suffer.

Given the objective to earn profits, and the different kinds of strategies that mainly deals with
the attraction of the masses to its product, Pepsi Co. is generally a corporation that wants many
customers for its products, not like other corporations that deals with luxury, specialization, or
even concentration to certain markets for thriving. As an auditor, the audit will deal with a
manufacturing corporation that has many products but still has its congruent characteristics to
make it simpler for the audit engagement.

In relation to FS misstatements, the business risks are researched upon. Given the facts above,
the business risk mainly revolves around the entitys brand name and its financial performance.
With this in mind, material misstatements will most probably root from negligent recording of
accounts because of the wide array of customers and fraudulent manipulation of numbers to
protect its brand name, employee relations, and shareholder satisfaction.


PepsiCo Achieves 2013 Financial Targets and Announces Increase of 35% in Cash Returns to Shareholders for 2014
PURCHASE, N.Y., Feb. 13, 2014 /PRNewswire/
-- PepsiCo, Inc. (NYSE: PEP) today reported its fourth-quarter
and full-year 2013 results and announced a substantial increase
in its targeted shareholder cash returns for 2014 and an extension
of its $1 billion annual productivity savings targets through
2019. The company also announced 2014 financial targets that
are consistent with its long-term goals.

According to the article mentioned above, the PepsiCo achieves its Financial Targets for the year 2013.
Therefore the risk of the management to take action in improving the business performance or to
misstate the financial statements is low.

Comparisons of an entitys performance with that of competitors.
Direct Competitor Comparison

Market Cap: 137.75B 183.95B 12.15B 59.90B 772.39M
Employees: 274,000 130,600 19,000 107,000 2.04K
Qtrly Rev Growth
0.01 -0.01 0.01 -0.02 0.14
Revenue (ttm): 66.54B 46.22B 6.04B 35.04B 299.45M
Gross Margin
0.53 0.61 0.59 0.37 0.46
EBITDA (ttm): 12.66B 13.09B 1.45B 5.65B 48.03M

Operating Margin
0.15 0.24 0.20 0.13 0.09
Net Income (ttm): 6.84B 8.37B 728.00M 1.96B N/A
EPS (ttm): 4.43 1.87 3.32 1.99 0.29
P/E (ttm): 20.65 22.42 18.73 17.84 25.12
PEG (5 yr
2.68 3.77 2.29 1.48 2.20
P/S (ttm): 2.08 3.96 2.01 1.70 1.73

KO = The Coca-Cola Company
DPS = Dr Pepper Snapple Group, Inc.

Our borrowing costs and access to capital and credit markets may be adversely affected by a
downgrade or potential downgrade of our credit ratings.
We expect to maintain Tier 1 commercial paper access which we believe will
ensure appropriate financial flexibility and ready access to global credit markets
at favorable interest rates. Any downgrade of our credit ratings by a credit rating
agency, especially any downgrade to below investment grade, whether as a
result of our actions or factors which are beyond our control, could increase our
future borrowing costs and impair our ability to access capital and credit
markets on terms commercially acceptable to us, or at all. In addition, any
downgrade of our current short-term credit ratings could impair our ability to
access the commercial paper market with the same flexibility that we have
experienced historically, and therefore require us to rely more heavily on more
expensive types of debt financing. Our borrowing costs and access to the
commercial paper market could also be adversely affected if a credit rating
agency announces that our ratings are under review for a potential downgrade.
See also Our Liquidity and Capital Resources contained in Item 7.
The article above show that there is a tendency that the credit line of the company will be affected by
their potential downgrade of credit ratings. This again increases that risk that there will be biases upon
preparing the financial statements.

Pepsi-Cola Products Philippines Inc. is spending P3.5 billion this year to expand
capacity and distribution as a way of maintaining double-digit growth, a company
official said Tuesday. Bulk of the capital expenditure is dedicated to grow production
capacity, president Partho Chakrabati told reporters at a briefing in Makati City."We'd
like to have a 20 percent manufacturing headroom annually," he said, adding he did
not have total capacity numbers on hand. Last year, the company earmarked over P4
billion in capex, of which 60 percent was allotted to complete the installation of three
new line facilities in Rosario, La Union, Muntinlupa and Davao.Chakrabati said they
also added a new line facility in Sto.Tomas, Batangas company's largest
manufacturing plant. "So this is where we largely spent the money in the expansion
plan," he said. This year, Chakrabati said he is confident of maintaining double-digit
growth in sales and profits. "We had a terrific year and I am quite optimistic. We have
all our programs in place," he said, declining to give out the full year numbers, citing
Philippine Stock Exchange and Securities and Exchange Commission disclosure rules.
In the first nine months of 2013, the company grew income by 12 percent to P780.7
million from P696 million on the back of a 17 percent jump in gross revenues to P19.4
billion."We got hit in one island plant in Tanauan, which is a large part of our volume
but we sustained a double-digit growth generally," Chakrabati said, referring to the
the damage to its plant caused by Typhoon Yolanda last November. He also noted the
beverage industry "did not spike much" despite the mid-term elections last May.
"Normally, a year after the election tends to be a little lower and I dont think that
will happen in 2014," Chakrabati noted. "In 2014, we will have good economic growth
and the beverage industry is expected to grow in line with the 6 to 7 percent GDP
growth and we hope to do better than that," he added. Pepsi-Cola Products
Philippines is a licensed bottler of PepsiCo Inc. and Pepsi Lipton International Limited
in the Philippines, manufacturing beverages under brands such as Pepsi-Cola, 7Up,
Mountain Dew, Mirinda, Mug, Gatorade, Lipton, Tropicana/Twister, Propel and Sting.
VS, GMA News
The article above tells us that the PepsiCo is planning to expand in the year 2014. In line
with the Issue of credit risk, the company might have biases in preparing the Financial
statements for them to acquire credit from various institution to fund their ambitious
expansion for the year 2014.

Changes in Internal Control over financial reporting
Official Statement of PepsiCo: During our fourth fiscal quarter of 2013, we continued migrating certain
of our financial processing systems to an enterprise-wide systems solution. These systems
implementations are part of our on-going global business transformation initiative, and we plan to
continue implementing such systems throughout other parts of our businesses over the course of the
next few years. Moreover, we continue to integrate our WBD business, which was acquired in 2011. In
connection with these implementations and integration, and resulting business process changes, we
continue to enhance the design and documentation of our internal control over financial reporting
processes to maintain suitable controls over our financial reporting.
Except as described above, there were no changes in our internal control over financial reporting during
our fourth fiscal quarter of 2013 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting


The Pepsi Co. has many shareholders that they have to answer too when certain things just do
not seem to add up. They have different teams of management to oversee every area of operation and
to make sure the company is running effectively and gaining the best profit possible. Like other
companies over the last few years they have had their ups and downs in certain areas. Though in 2011
they came up with a new operating model that would help simplify the process, make faster decisions,
reduce costs, and get products to the market faster.

Pepsi is motivated by the shareholder value and does everything possible to make sure that
happens. They do this by maintaining and growing in key markets, looking for other ways to grow, and
keeping a close eye on capital investments to insure the shareholders a return on their investments.
Pepsi has many teams that work together in the beverage and snack departments to research and make
sure that the proper choices are made and they can continue to grow in every aspect of the company
whether it is in the United States or in one of the many other countries that they have companies in. The
shareholders have a lot to do with a companies success because if they are not happy then a company
knows that they have to make changes, even if it means management changes.

(a) Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the participation of our management, including our
Chief Executive Officer and Executive Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures, as such term is defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer
and Executive Vice President and Chief Financial Officer concluded that as of the end of the period

covered by this report our disclosure controls and procedures were effective to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms, and (2)
accumulated and communicated to our management, including our Chief Executive Officer and
Executive Vice President and Chief Financial Officer, to allow timely decisions regarding required
(b) Managements Annual Report on Internal Control over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation
of our management, including our Chief Executive Officer and Executive Vice President and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based upon the framework in Internal Control Integrated Framework (1992) by the
Committee of Sponsoring Organizations of the Tread way Commission. Based on that evaluation, our
management concluded that our internal control over financial reporting was effective as of December
28, 2013.Attestation Report of the Registered Public Accounting Firm. KPMG LLP, an independent
registered public accounting firm, has audited the consolidated financial statements included in this
Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the
effectiveness of our internal control over financial reporting.