Effects on Accounts Due to the First Retail Store
The opening of the first retail store will impact account receivable, inventories, sales revenue, and cash at the bank. Inventories will particularly increase. Initially, the company stored merchandise delivered by its major suppliers in a warehouse in Sacramento. The need to ship inventory by trucks when it got low existed. The new store, which uses the just-in-time inventory system, however, ensures maximum inventory is stored and hence, readily available to customers (Johnson et al., 2019). With increased inventory, an increase in sales due to the possibility of product diversification and hence, the attraction of more customers is possible. In such a case, sales revenue at the bank will increase. Cash at the bank is, however, also affected by other factors such as debts. If the debt incurred for the new store’s management is more than the revenue the business earns, revenues from sales are likely to decrease, especially if the loan’s interest rate is high. Furthermore, if the store is efficiently managed, accounts receivable will increase as sales increase.
Business Structure Change and Effects on Audit Risk Components
With the business change, inherent audit risks are likely to increase exponentially. With an increase in inventory, complexities in transactions are likely to be realized. This is especially true when the store is linked to several distribution centers as well as warehouses. Aside from the above, control risks are likely to be lower because of the store’s ability to control internal threats that could result in fraud and error. Material misstatement is likely to be avoided during the financial statement preparation because internal control measures such as putting in place closed-circuit television cameras prevent theft of merchandise. Another audit risk component that will be affected is the detection risk. Although detection risks in different auditing undertakings are, in most cases, present, they could be significantly reduced by increasing the sample size transactions that are sampled for auditing purposes. With increased transactions, the need for sampling increases because of the complexity of auditing a majority of transactions that pertain to the new retail store.
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Changes to Inventory Transactions and Balances
An increase in inventory transactions is highly likely when a new retail store becomes operational. Requesting for transfer of merchandise, approving the transfer and initiating the signing and pick up process will be positively impacted because the movement of inventory from the warehouses and distribution centers to the retail store will increase.
According to the Cloud 9 Trail Balance sheet, there would be an increase of $28,207,545 in credit and debit cash between 2021 and 2022. Balances are influenced by a myriad of aspects, such as assets initially owned by the company, debt, and capital stock. Inventory transactions would hence be more affected by a change of business structure because balances are a total sum of business aspects, some of which are not influenced by the introduction of a new retail store.
Description of Population(s) and Recommended Sampling Approach
The population to be tested is either a given class or set of transactions or account balances pertaining to the entity (Johnson et al., 2019). The transactions or account balances can be chosen from a representative sample randomly, or the auditor can determine the best estimate. It is imperative that all transactions are represented by selecting samples from each class of transactions. Although it is recommended that both statistical and non- statistical sampling approaches are used for substantive inventory testing, the auditor should rely more on the statistical sampling (Demartini, Chiara, & Trucco, 2016). This is because of the possibility of determining the sample size objectively, hence, error reduction.
References
Demartini, C., & Trucco, S. (2016). Audit risk and corporate governance: Italian auditors perception after the global financial crisis. African Journal of Business Management , 10 (13), 328-339.
Johnson, R. N., Wiley, L. D., Moroney, R., Campbell, F., & Hamilton, J. (2019). Auditing: A Practical Approach with Data Analytics . New York: Wiley.
