Auditing standard and practices in retail

Auditing standard and Practices in Retail

Questions

Research Project

This assignment is a research component within the Auditing Practice assessment. There is no model answer to this assignment. You need to conduct desk research and based on this and any anecdotal evidence and/ or personal experience consider the questions given.

Topic

Inherent risk, in a financial audit, measures the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in cycles before considering the effectiveness of internal controls.

Industry Sector of Interest

Consider the risks inherent to the retail industry such as grocery supermarkets and conduct research about the following questions.

List and describe the possible inherent risks in the retail industry. (20 marks)

Determine which inherent risks may currently be considered critical. (20 marks)

Determine which practices might address the inherent risk identified in’2’ above. (10 marks)

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Introduction to Inherent Risk In Retail

Meaning

Inherent risk is a term mostly used by the auditors.

It implies the risk which can be arises mainly due to the incorrect or faulty accounting process.

Recently the changes of accounting standard and practices imposes threat on retailers.

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What creates Inherent risk in Retail?Economic Slowdown- It affects the profitability, marketability and goodwill of the business.

It creates an adverse impact on the overall performance of the business.



What creates Inherent risk in Retail?Price movements-Due to competitive advantage prices are getting reduced for product and services all over the globe.

The retailers are forced to cut its prices in order to sustain in the market.



What creates Inherent risk in Retail?Inefficiency of supply

chain-

If the distribution channel of

the company is not effective then the company might faces the difficulty to reach to the consumers all over the world. It will results other firms to enter in to the market.

Effect on goodwill-

A retail organization can be damaged due to its poor customer service or not maintaining the governmental regulations.



What creates Inherent risk in Retail?

Increasing Competition- This might be the most influencing factor on the risk of the organization. In retail sector each and every firm faces competition which is increasing day by day. It forces the retailers to provide high quality product at a low cost.



What creates Inherent risk in Retail?.

Technological obsolescence- In order to meet the customer demand an organization must be more and more innovative.

It can only be possible by adopting new technologies like ERP, MIS etc but it involves too high maintenance cost.



What creates Inherent risk in Retail?….Changes in regulatory

framework- If the legislation or the

regulatory framework is changed then it may cause risk for the retailers.

For example change in the tax structure, registration policy etc are the example of government intervention.

Problems in managing employees-

Sometimes problems are faced by a retail store if the supervisor is not capable enough to manage its subordinates.

It causes theft, cash embezzlement, dishonesty on the part of the employees and the organization is getting affected.



What creates Inherent risk in Retail? Lack of healthy relationship- An organization does not exist in

isolation. It is basically an integrated system where vendors and suppliers are like the pillars. If a good relationship does not maintain with them then the retailer will not be able to supply goods to its customers.

On the other hand in order to reduce the cost of production it is required to get discounts from the suppliers.

Failure to this may hamper the organizational sustainability.



Critical areas imposing threat in retail

Competition- In today’s world competition is the most problematic issue

for retailers. Because now there are countless of retailers who are operating not only by the physical stores but also online.

It makes the retails more consumer friendly. But implementation of user friendly technology is too costly and if the firm cannot meet them in time then it cannot be able to cope up the market.


Critical areas imposing threat in retail….Governmental intervention This area is also critical and complex for the retailers and

the more complexity is mainly due the fact that the company does not control this.

It have an impact not only on the particular firm but on the whole sector. For example due to some government legislation in India.

FDI was not allowed in retail as a result of which the retail giant Wall mart was not supposed to enter in Indian market, though now this legislation has been removed but it obviously hampered the overall sector.



Critical areas imposing threat in retailInflation It is one of the important issue creating problem to the

whole economy. Inflation means increase in price level in the economy and the purchasing power is getting down.

Retailers face problems in both way either they have to increase their profit as a result there commodity cost increases and may not affordable by common people or they have to retain there price as before. In both the way they faced losses.



Critical areas imposing threat in retail

Consumer Dissonance Consumers' are now more informative in nature. They have

the knowledge about the new product and services. So they always want latest trendy things.

For this retailer should have enough stock of new products otherwise they would not be able to satisfy the demand.

It will create a dissonance in the mind of the consumers and they may shift their preference.



Resolving The Issues.Providing innovative products and services. For Example Green Products like solar heater, availability of solar ATM which is a part of retail banking. This will encourage the consumers towards protection of environment.



Contd

Effective risk management by recruiting talented risk analyst who can assess the risk and give probable solution. This can reduce the risk and increase the efficiency.



Contd…

Retention of certain program like offers, discounts etc. it will attract more customers and if the product quality is good then they might become the loyal customer.



Critical areas imposing threat in retailCollection of feedback from each consumers.

It will help them to realize their ineffective area and they can find out the reason behind it and can take necessary actions.



Critical areas imposing threat in retailInternal control and internal

check system provides better controlling of the activities.

It is a system designed in such a manner where the work of one person is automatically checked by the other.

So it will give the benefit of specialization in management.

Proper maintenance of accounting standard, auditing standard is required because if the retail firm is not complied with the rules and regulations of the accounting then it will be a legal issue and the image of the company may hamper.



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Decision-Making Approach. USA: Kogan Page Publishers.Brazel, J. F., Jones, K. L., & Prawitt, D. F. (2013) Auditors' Reactions to

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Drake, P.P. & Fabozzi, F.J. (2012) Analysis of Financial Statements (3rd ed.). USA: John Wiley & Sons.



References…. Gramling, A. A., O'Donnell, E. F., & Vandervelde, S. D. (2013) An Experimental Examination

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Institute Of Internal Auditors, 2(4). Whittington, O.R. & Delaney, P.R. (2011) Wiley CPA Exam Review 2012, Auditing and

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Education

Auditing standard and practices in retail