Dell Computer Corporation (Dell) is a worldwide provider of products and services that enable customers to build information-technology and internet infrastructures. Dell offers a broad range of product categories, including desktop PCs, servers and networking products, storage, mobility products, software and peripherals, and service.1 The company conducts operations worldwide and is managed in three geographic segments: the Americas based in Round Rock, Texas; Europe based in Bracknell, England; and Asia Pacific-Japan based in Singapore. Dell has manufacturing facilities in and around Austin, Texas; Winston-Salem, North Carolina; Lebanon and Nashville, Tennessee; Reno, Nevada; West Chester, Ohio; Miami, Florida; Limerick and Athlone, Ireland; Penang, Malaysia; Xiamen, China; Hortolandia, Brazil; Chennai, India; and Lodz, Poland. Net revenue for fiscal 2008 was $61.1 billion and net income was $2.9 billion.

The company’s business strategy combines its direct customer approach with a highly efficient manufacturing and supply chain management organization with an emphasis on the use of standards-based technologies. This strategy enables Dell to provide customers with superior value; high-quality, relevant technology; customized systems and services; superior service and support; and differentiated products and services that are easy to buy and use. The direct customer approach enhances Dell’s understanding of customer expectations. This direct customer focus allows the company to update information about customers’ current and future needs, which are used to continually refine future products and services. The company’s highly efficient supply chain management and manufacturing organization along with its concentration on standards-based technologies allow Dell to maintain the lowest cost structure among major competitors; Dell then passes those savings on to customers. Focusing on standards-based technologies gives customers the benefit of extensive research and development while providing flexibility and choice. Dell’s direct customer approach and highly efficient supply chain management and manufacturing organization also allow it to more quickly introduce new technologies to customers.

Dell common stock is traded on the NASDA(^national market, and Dell is required to have an integrated audit of its consolidated financial statements and its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). As of the close of business on March 14, 2008 Dell had 2,042,291,533 shares of common stock outstanding with a trading price of $20.06.

INFORMATIONABOUT THE AUDIT Your firm, Smith and Jones, PA., is in the initial planning phase for the fiscal 2009 audit of Dell Computer Corporation. As the audit senior, you have been assigned responsibility for gathering and summarizing information necessary to evaluate Dell’s business risk. Your firms memorandum related to the client business risk evaluation has been provided to assist you with this assignment. Assume no material misstatements were discovered during the fiscal 2008 audit.

REQUIRED [1] Go to Dell’s web site (http://www.dell.com) and click on the About Dell link. Review background and investor information provided about Dell. Click on the Investor link in the About Dell section and print and read the most recent SEC Form 10-K provided for Dell.
[2] Based on the information obtained from the web site and your knowledge ofthe industry prepare a memo discussing the following items:
[a] Dell’s:
■ Sales ■ Total assets ■ Net income ■ Number of employees ■ Cash flow from operating activities [b] What are Dell’s products?
[c] Who are Dell’s competitors?
[d] Who are Dell’s customers?
[e] Who are Dell’s suppliers?
[f] How does Dell market and distribute its products?
[g] What is Dell’s basic business strategy (cost leadership or differentiation)?
[h] What are critical business processes for Dell given its basic business strategy (for example, supply chain management)?
[i] What accounting information is associated with the critical business processes and how does Dell measure up on that information?
[j] What accounting methods does Dell use to report the accounting information associated with critical business processes and what is the risk of material misstatement?
This memo is to be used as a foundation document for the preliminary business risk assessment. In evaluating Dell’s performance and assessing the risk of misstatement, please be sure to describe your reasoning. Your memo should be double-spaced and addressed to the partner for the engagement (your instructor). Your firm demands polished, concise, professional analyses and writing. Be thorough, but get to the issues without unnecessary verbiage. In describing your analyses and conclusions, please consider relatively short “punchy” or to-the-point sentences. When appropriate, consider using bullet point listings.
[3] Auditing Standard Section 314, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, provides guidance on the auditor’s consideration of an entity’s business risks. What is the auditor’s objective for understanding an entity’s business risks? Why does an auditor not have responsibility to identify or assess all business risks? Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit.

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Smith and Jones, PA. Memorandum: Business Risk Evaluation This memorandum provides a general framework for firm personnel when evaluating client business risk for purposes of determining the nature, timing, and extent of audit procedures. Knowledge about the nature of the client's business activities and related business risks provides a basis for the auditor's assessment of the risk of material misstatement. The auditor's assessment of the risk of material misstatement is used to determine the nature, timing, and extent of audit procedures. The intent of this memorandum is not to suggest that this framework must be followed on all audit engagements. The appropriateness of this framework must be determined on an engagement by engagement basis, using professional judgement. Client business risk is the risk that a client's business objectives will not be achieved. Business risk results from the interaction of internal and external business forces. Clients achieve business objectives by setting strategies and then designing and implementing processes to execute those strategies. Strategies represent the overall approaches used by management to achieve its business objectives. Business risk is reduced when the client effectively aligns its business strategy and processes with the external business environment. Business risk is increased when the client does not effectively align its business strategy and processes with the external business environment or when new external business conditions emerge to weaken the alignment. The dynamic nature of today's business environment requires that clients do more than develop processes to execute their current business strategy. Clients must also develop processes to monitor the changing business environment and reorient their strategies and processes as environmental business conditions change. Clients must continually scan their business environments for changes that may threaten achievement of their business objectives. To assess the risk of material misstatement auditors must understand the client's current business strategy and environment along with emerging business forces that may require reorientation of its current strategies and processes. A proper analysis of a client's business risk requires an understanding of the client's business strategy, the client's internal business processes, and emerging business forces. Important aspects of understanding each of these dimensions are discussed below. Understand Emerging Business Forces The starting point for performing a business risk analysis is to understand the external business environment in which the client operates. This analysis is an essential first step because it allows the auditor to properly frame the subsequent analysis of the client's strategy and internal business processes. Understanding the client's business environment enables the auditor to assess the sustainability of the client's business strategy and to identify critical business processes. External business forces influencing business risk are: Customers - aspects to consider include size and number of customers in industry, availability of competitor products or services, similarity of competitor products or services, ability of customers to switch to competitor products or services, complementary/substitute products or services, and desired qualities/features of products or services. . Competitors-aspects to consider include number and size of firms in industry, maturity of products or services in industry, production capacity of firms in industry, required capital investment to enter industry, availability/access to distribution channels, and legal or regulatory barriers to industry. Suppliers-aspects to consider include number and size of suppliers in industry, number and size of customers for supplier products or services, relative importance of supplier products or services to client's products or services, similarity of supplier products or services, complementary/substitute products or services, and cost of switching suppliers. Labor aspects to consider include required competencies of employees, availability of employees, and other employment opportunities for employees.