Analyze the income statement for any potential risk factors and compliance issue with the Generally Accepted Accounting Principles (GAAP)
Target Corporation is one of the most expansive retailers in the United States of America headquartered in the city of Minneapolis, Minnesota, the United States of America. The total revenue at Target Corporation has had a continuous increase between the financial years 2017 and 2019. However, a look at the income before tax exhibits a drop between 2017 and 2018, followed by a rise in 2019 (Yahoo Finance, 2019). The continual increment in the revenues and a constant reduction in the amount used for expenses are expected to bring about a steady rise in the income before tax. Therefore, the income before tax between 2017 and 2018 needs to be investigated. The primary compliance issue that the organization may have with the GAAP in this scenario involves the treatment of revenue from different streams (Yahoo Finance, 2019). Like most of the firms in the US and the rest of the world, Target Corporation may not have found the best method to recognize the revenue attached to the multiple obligations.
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Analyze the risk factors and compliance issues with the GAAP on the balance sheet
A look at the long-term debt figures of Target Corporation in the last three financial years indicates a steady decrease in the same. The company's trend in long-term debt is one of the factors that influence the investors and financial lenders decisions towards the investments in the company (Target Corporation, 2018). However, most of the major companies in the retail sector both in the US and the rest of the world have had to borrow in the long term to maintain their everyday business operations. From a business perspective, it may raise the alarm why Target Corporation's long-term debt is reducing while the other companies in the same industry as target have their long-term debt increasing (Target Corporation, 2018). Regarding the potential risk factor, Target Corporation may be breaching the GAAP principle of consistency in financial reporting which may cause issues within the administration.
Using the internal control, analyze the cash and revenue for potential risk factors.
What risks need to be documented?
One of the potential risks that result from the analysis of revenue and cash is fraudulent reporting. With Target Corporation expecting revenue and cash from different streams each year, it may be considered fraud if there were misstatements in the reporting of both the cash and revenue (Ionescu, 2016). Fraudulent reporting may involve abrupt increases of either cash or revenue to attract the investors and the financial lenders to a company such as Target Corporation. Therefore, the management of the company needs to double-check their reports to be free of fraudulent reporting.
How does this information compare to the company or industry averages, or the company's past performance?
The company's performance in revenue has indicated a rise over the financial years 2017, 2018 and 2019. In 2017, Target Corporation recorded a revenue of US$ 70,271,000,000. The company's revenue grew to $ 72,714,000,000 in 2018 and further increased to $ 75,356,000,000 in the fiscal year 2019 (Yahoo Finance, 2019). Compared to the three years mentioned above, the revenue of the company in the financial year 2016 stood at $ 73,785,000,000. Therefore, the revenue declined between 2016 and 2017.
Explain the population and how you identified it
In the audit sampling procedure for the financial documents posted by Target Corporation, the population used included the revenue and the income before tax as in the income statements. The figures used for the auditing process were derived from the company's financial reports encompassing the fiscal years 2017, 2018 and 2019. In the balance sheet, the population used was long-term debt. Target Corporation’s long-term debt was compared across the three given financial years. The long-term debt fell under the long-term liabilities sector under the liabilities segment of the company's balance sheet. The figures used for the comparison procedures were those posted by Target Corporation on its financial reports. The information regarding the cash and cash equivalents of the organization as a population of the auditing process was derived from the assets segment of the company's balance sheet for the last three financial years.
Based on your analysis of risk, devise a sampling program for the population
Target Corporation is vulnerable to potential risks in financial reporting that may place the organization in bad books with the GAAP. Auditing the company's reports is a way of identifying the risks so that the management of the company makes an effort of dealing with them. The most appropriate sampling method in auditing to be used is random selection (Nigrini, 2017). The random selection allows all parts of the population involving the financial documents to have equal chances of selection in the procedure. The random selection, therefore, grants an auditor the freedom to select the population at will rather than being constricted to an already established population. Such an approach guarantees the effectiveness of the process of auditing. Random selection of the population in auditing eliminates the threat of bias that some auditors may have regarding the process of auditing, such as in target corporation (Baylis et al., 2017). The major demerit of the sampling program used is that it may lead to skipping out on significant errors evidenced by the random selection of the variables.
Choose the most preferable audit testing procedures that could be used, based on the items sampled in this situation
Based on the items of financial reports that have been sampled in the situation, the most appropriate audit testing procedure to be used is the classification testing. In the classification testing, the audit procedures performed are used to determine whether the transactions involved were correctly classified in the accounting records (Flynn et al., 2018). For instance, the bank transactions between Target Corporation and the financial lenders may be accessed to ensure that they add up to the long-term debt concerning aspects such as repayment. Classification testing is essential in the detection of errors in financial reports that may be classified as fraud by the GAAP. The audit testing procedure may also be used to ensure that the financial reports posted by the organization as an accurate record of target corporations economic performance (Appelbaum, Kogan & Vasarhelyi, 2017). Therefore, for the population in audit sampling selected in the case of Target Corporation, classification testing is the most preferred audit testing procedure.
References
Appelbaum, D., Kogan, A., & Vasarhelyi, M. A. (2017). Big Data and Analytics in the Modern Audit Engagement: Research Needs. Auditing: A Journal of Practice & Theory , 36 (4), 1-27.
Baylis, R. M., Burnap, P., Clatworthy, M. A., Gad, M. A., & Pong, C. K. (2017). Private Lenders’ Demand for Audit. Journal of Accounting and Economics , 64 (1), 78-97.
Flynn, L., Snavely, W., Svoboda, D., VanHoudnos, N., Qin, R., Burns, J., ... & Marce-Santurio, G. (2018, May). Prioritizing Alerts from Multiple Static Analysis Tools, using Classification Models. In Proceedings of the 1st international workshop on software qualities and their dependencies (pp. 13-20). ACM.
Ionescu, L. (2016). Mechanisms for Enhancing Ethical Behavior in the Accounting Profession. Contemporary Readings in Law and Social Justice , 8 (2), 263-269.
Nigrini, M. J. (2017). Audit Sampling Using Benford's Law: A Review of the Literature with Some New Perspectives. Journal of Emerging Technologies in Accounting , 14 (2), 29-46.
Target Corporation. (2018). 2018 Annual Report . Retrieved from https://corporate.target.com/_media/TargetCorp/annualreports/2018/pdfs/2018-Target-Annual-Report.pdf
Yahoo Finance. (2019). Target Corporation (TGT) Income Statement . Retrieved from https://finance.yahoo.com/quote/TGT/financials?p=TGT
