Cloud 9 Inc.’s decision to open a new retail store has positive and negative effects on its accounts. In the long run, the business will experience increase in market share, advertising opportunities, and gain customer confidence. Additionally, the organization will have investor confidence essential for promoting positive financial risks when it undergoes several changes in its business structure. As a company producing daily use products for the end user, Cloud 9 Inc. needs to be closer to the customers for accessibility ( Johnson & Wiley, 2019) . Further, market share increases with the opening of a new retail shop since the footwear is readily available to the end user. Therefore, the acquisition of McClellan Shoes by cloud 9 Inc. gives the latter’s customers a wide range of options to choose. The mentioned company will have increased client retention rates and sales volumes. Typically, customers purchase products within their reach. Therefore, if Cloud 9 Inc. acquires McClellan Shoes, it reaches more clients easily, which is a value addition aspect for the organization. The new outlet could become an advertising venue for the brand which in turn creates more awareness about the foot ware to its potential customers.
Moreover, Cloud 9 Inc.’s investor confidence will grow when it opens new stores because it has an excellent financial profile .When a company is spends on itself, investors are likely to proffer their money for investments expecting a higher return based on the confidence developed by the firm expenditure. In a separate scenario, new Cloud 9 Inc. stores create an advertising opportunity for the firm because they will market the company’s products a reduced cost as opposed to an aggressive marketing campaign that would be costly ( Johnson & Wiley, 2019) . Cloud 9 Inc. risks financially when it opens an outlet from the cost involved regardless of lack of guarantee on expected returns on investments. Cloud 9 Inc will incur the cost of hiring new staff to sell in the new store. Finally, there is an immense cost of logistics involved in transfer of the goods from their warehouse to the new store and the cost of renting and furnishing the new outlet to prepare it for business.
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Question Two
The business change Cloud 9 Inc. intends to undertake will affect its audit components significantly. Organizations conduct audits to check if their financial statements reflect their enterprise position accuracy, based on the data provided collected during the auditing periods. Audit components, comprising control, detention, and inherent risks will apply to the new business model of Cloud 9 Inc. (Levan, 2018). Typically, large firms with many employees experience challenges in storing essential business records, which raises the audit risk levels. In the mentioned organizations, employees are likely to hide their mistakes to protect their jobs. Moreover, financial statement spreading out between the new Cloud 9 Inc.’s warehouse, outlets, and production in Vietnam and Canada sales might make the consolidation of the organization’s financial statements difficult. If Cloud 9 Inc. presents inaccurate records to the auditor, it will receive wrong audit results. However, the change of the audit firm has an advantage because the new auditors might find something that the former auditor missed. Errors may occur during audit hence the need to change the process and the man power for the process. For instance, the new auditor might miss crucial information because they are not accustomed to a business’s patterns and employees’ operation ability. Further, the previous audit firm may mislead the new firm in order to maintain the competitive advantage over their peers hence the audit risk. Finally, businesses are also likely to withhold documents that contain errors made during the last audit making inherent risk more likely to occur.
Question Three
Business structures should have inventory transactions changes for safeguarding their assets and prevention of possible losses. Some of the transaction changes businesses should adopt include use of accurate and reliable inventory record and inventory management systems, cycle, and random counts ( Johnson & Wiley, 2019) . Employees handling business inventory may be affected by business structure changes most. Inventory management system use helps the management to determine available store stocks and the quantity of goods sold and sales made in real time without having to check the physical records easing audits. In cases where the inventory management system appears erroneous, actual physical count may be done in the store so as to keep accurate and reliable records about the sales and the inventory.
Question Four
Finally, substantive testing may be conducted on bank statements, records from lenders, customer information, suppliers’ records, physical inventory and sales records. Substantive testing helps businesses to check financial statements alongside supporting documents for accuracy. Bank statements provide a true picture of cash movement in and out of the company accounts. Ensuring that the customers received exactly what the sales records indicate contacts is made to a few customers at random to verify the information. Inventory management system stock balance could vary with the actual stock hence the need for the physical count. Lenders records will give a true picture on actual loans statements as well as the interests incurred.
References
Johnson, R. N., & Wiley, L. D. (2019). Auditing: A practical approach with data analytics .
Sabauri, L. (2018). Audit risk management and its effect on the audit of financial statements. Education, Technologies, Information, Communication and Tourism in terms of Globalization , 215-220. https://www.researchgate.net/publication/326461256_AUDIT_RISK_MANAGEMENT_AND_ITS_AFFECT_ON_THE_AUDIT_OF_THE_FINANCIAL_STATEMENT
