Audit risks usually occur due to various organizational activities. Similarly, Cloud 9 Inc. performs various corporate activities that may make it face some business risks. This report discusses Cloud 9 Inc.'s business operations and how each management action can increase or decrease audit risks.
Effects on account of the Opening of the First Retail Store
Cloud 9 Inc. will experience various impacts when it opens the first retail store. Currently, Cloud 9 utilize just-in-time inventory control and management system, which requires an entity to receive its stock from the closest store when customers make purchase orders. Therefore, if Cloud 9's first retail store is far from the production plant, a just-in-time inventory control system may not be suitable because it will take a longer time to receive customer orders at the new stores. If the company takes longer to deliver inventory to its stores from production points, its business activities will be adversely affected because customer demands may not be met in time (Corporate Finance Institute, 2020). Therefore, Cloud 9 should use an appropriate inventory control and management method, which will not affect its business operations when it expands its activities. In case Cloud 9 opens the first store, it will transfer all accounts receivables for all sales made as a wholesaler to complete its transaction recording process. However, the transfer of accounts receivables to a new retail store may increase inherent risks for the company because different inventory recording and reporting may be used due to different management styles. Cloud 9 should ensure that its retail store uses the inventory management approach to avoid this audit risk.
Delegate your assignment to our experts and they will do the rest.
How Business Changes will affect Audit Risk Components
A change in Cloud 9's business operations will cause an increase in audit risks in different ways. When the company operates many inventory stores, it is likely to face a high risk of material misstatement on its financial statements if appropriate accounting procedures are not followed accordingly. Lose inventory can easily be mishandled by accounting professionals through failing to record them in books of account for personal gain (Corporate Finance Institute, 2020). To avoid such risk, the company should use a First in First Out inventory management approach to ensure all items are recorded when received at new stores and when used or sold out.
Besides, a change in organization operation and management by using advanced technology to provide customer care services may increase the reputational risk for Cloud 9. When the company adopts a customer service program and fails to serve customers, it may destroy its reputation because a few customers may consider the issues a normal problem (Corporate Finance Institute, 2020). Thus to avoid such risk opportunities, Cloud 9 should test the effectiveness of all technological programs it adopts to ensure their work efficiently. Subsequently, this will help to reduce or avoid reputation risk sources. In addition to reputational risk, advanced technology can increase public safety risk for the company (Corporate Finance Institute, 2020). For instance, if Cloud 9 uses technology to record and keep customer information such as purchase orders, credit sales made, and cash sales, it may face public safety risk if unauthorized person access customer information through cybercrime activities (Public Company Accounting Oversight Board, 2021). Therefore, Cloud 9 should use more secure technological components and programs to prevent access to customer information by unauthorized persons.
Expected Changes to Inventory Transactions if the company changes its Structure .
A change in the business structure of an entity ultimately must affect its business operations. If Cloud 9 changes from operating a wholesale store only to wholesale and retail stores, its inventory control and management approach will significantly change. First, the company will be required to retain a certain amount of inventory at its production points to meet daily sales because it sells its products to final consumers and retailers who resell the final consumers (Accounting Guide, 2020). In such a case, Cloud 9 may face inventory management issues because it will operate as a wholesaler and as a retailer. As a result, inventory management such as First in First Out may not be applicable because Cloud may retain earlier manufactured goods to meet its retail sales. Therefore, it important for Cloud 9 to remain operating as a wholesale only to avoid inventory management issues due to change in business structure.
However, the company’s inventory balances will be impacted the most by a change in organizational structure because the wholesale and retail stores may not use similar inventory management approaches (Public Company Accounting Oversight Board, 2021). As such, Cloud 9 should retain its current business structure to enhance efficient operations due to appropriate inventory control and management.
Population Description and Sampling Approach for Substantive Inventory Testing
The population in Cloud 9’s case comprises various particulars such as sale reports, inventory levels held by the entity, population sample for testing validity of cash and credit sales, and sales samples include cash and credit sales. A random inventory sampling method is the most appropriate for testing substantive inventory because it gives all items equal chances of being selected (Public Company Accounting Oversight Board, 2021). The auditor should assess the completeness, correctness, and existence of all inventory recorded in the company’s financial statement to ascertain whether they reflect a true and fair value of the firm. Also, an auditor must assess whether the company follows and complies with International Financial Reporting Standards guidelines when preparing and reporting its financial information.
References
Accounting Guide. (2020, May 26). Sampling risk in audit . Accountinguide. https://accountinguide.com/sampling-risk-in-auditing/
Corporate Finance Institute. (2020, July 27). Audit sampling - Overview, purpose, importance, and types . https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-is-audit-sampling/
Public Company Accounting Oversight Board. (2021, February). AS 2315: Audit sampling . Default. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2315
