Overall Understanding
Gaining an overall understanding of the wholesale and retail industries is a vital step in conducting retail audits. The two industries have unique features which impact the audit strategy and direction. The retail and wholesale industries carry out key functions that guarantee the smooth flow of goods, information, and cash. Retailers and wholesalers link the manufacturers and end consumers. Final goods produced by manufacturers reach end consumers through transactions that involve both buying and selling. A key characteristic of firms in the retail and wholesale industries is a wide assortment of merchandise to provide choice among consumers (Cavusgil et al., 2014) . For this reason, retailers and wholesalers have high levels of inventory. The wide variety of products means that retailers and wholesalers require huge storage capacity and, as a result, are accustomed to using warehouses. Problems associated with inventory management, for instance, stockouts and overstocking, are common in such industries. Firms in the retail and wholesale industries have low margins due to the presence of many retail and wholesale firms. Consumers can compare prices easily and purchase goods from retailers and wholesalers located globally. In effect, retailers and wholesalers have to offer their products at low prices to attract consumers. Retail and wholesale goods have a high price elasticity of demand since their price changes lead to substantial changes in their demand (Schuster, 2013) . In addition, retail and wholesale products are typically discretionary items, and consequently, consumers tend o be frugal and picky. The low margins prompt retailers and wholesalers to rely on high product volumes to ensure feasible operations.
There are key areas that impact financial reporting, given the unique characteristics of the retail and wholesale industries. A major area is inventory. The high levels of inventory kept by retailers and wholesalers mean that there is a risk of inventory loss through damage, obsolescence, or pilferage. Financial reporting is likely to be affected by such a risk. Another area that affects financial reporting is the buying and selling process. Retailers and wholesalers are engaged in the constant buying and selling of products. The high frequency of sales and purchases means that mistakes are likely to occur when recording the transactions. The transactions are further complicated by the purchase or sale of goods on credit. Recording credit transactions is a complex process, and, as a result, financial reporting is made more challenging in such a case.
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Cloud 9’s Financial Position
The ratio analysis of Cloud 9 is depicted below.
| Ratio | 2021 | 2020 |
| Current ratio | =2.21 | =1.84 |
| Cash ratio | =0.17 | =0.12 |
| Debt ratio | ||
| Debt-to-equity ratio |
Cloud 9’s current ratio increased from 1.84 in 2020 to 2.21 in 2021. The increment bodes well for the retailer since it means that its capacity to meet its current debt obligations improved between fiscal years 2020 and 2021. The current ratio of 2.21 means that Cloud 9 has more than enough current assets to settle its short-term obligations. Cloud 9’s cash ratio increased from 0.12 in 2020 to 0.17 in 2021. The increment in the liquidity metric meant that Cloud 9’s capacity to settle its short-term liabilities with only the cash and cash equivalents increased between 2020 and 2021. Cloud 9’s debt ratio reduced between 2020 and 2021. The decrement in the solvency metric meant that Cloud 9’s business became more financially stable. The current low debt ratio means that Cloud 9 has a low level of financial risk. The debt-to-equity ratio also reduced between 2020 and 2021. The ratio’s decrease is favorable for Cloud 9 since it depicts the improvement in Cloud 9’s financial stability. Cloud 9’s financial analysis shows that the retailer is in a good financial position.
A key business risk faced by Cloud 9 is bad debts. The entity has a high accounts receivable amount meaning that it has sold a large number of goods on credit, and there is a high risk of default among debtors. Another major business risk is the financial risk associated with the increase in debt. Cloud 9 increased its debt level by acquiring an additional loan of seven million dollars from Windsor Bank (Johnson et al., 2019) . The increase in the entity’s debt increases its risk of collapsing.
Areas of Special Emphasis
A key area to focus on during the audit is the process of recording inventory. The entity has a high level of inventory, and it is material in nature, given that it forms almost forty percent of Cloud 9's current assets. The auditor should verify the stock levels to ensure that they are accurately reflected in Cloud 9's financial records. In this respect, the auditor will verify whether the inventory figures have been misrepresented to hide pilferage. The cash receipts process is another area of emphasis in the audit. Cloud 9's cash and cash equivalents are substantial and material and are prone to fraud. The cash receipts process is prone to errors, with the bank making errors in entering customers' numbers. Fraud is likely to occur in such an area when an individual takes advantage of the bank's errors.
Inventory is a key problematic area for Cloud 9, given the large amount of inventory held by the retailing company. According to Cloud 9's management, the company faces problems identifying the ideal stock quantities to ensure maximum availability of products to customers (Johnson et al., 2019) . In addition, the management cites that merchandise theft has occurred.
References
Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business . Pearson Australia.
Johnson, R. N., Wiley, L., Moroney, R., Campbell, F., & Hamilton, J. (2019). Auditing: A practical approach with data analytics . John Wiley & Sons.
Schuster, G. (2013). Network marketing - enrichment or deception? Grin Verlag.
