Question

You are a graduate working for W&S Partners, an Australian accounting firm with offices located in

each of the major cities. W&S Partners has just won the 31 December 2016 statutory audit for Cloud 9

Pty Ltd (Cloud 9). The audit team assigned to this client is:

Partner, Jo Wadley

Audit Manager, Sharon Gallagher

Audit Seniors, Josh Thomas and Suzie Pickering

IT Audit Manager, Mark Batten

Graduates, Ian Harper and you.

As a part of the risk assessment phase for the new audit, the audit team needs to gain an

understanding of Cloud 9's structure and its business environment. By understanding the client's

business, the audit team can identify potential risks that may have a significant effect on the

financial report. This will assist the team complete the audit.

Required

Answer the following questions based on the additional information about Cloud 9 presented in the

appendix to this text and the current and earlier chapters. You should also consider your answer to the

case study questions in earlier chapters where relevant.

Your task is to research the retail and wholesale footwear industries and report back to the

audit team. Your report will form part of the overall understanding of Cloud 9's structure and its

environment.

You should concentrate your research on providing findings from those areas that have a

financial reporting impact and are considered probable given Cloud 9's operations. In conducting

your research, you should consider the following key market forces, as they relate to Cloud 9's

operations.

General and industry-specific economic trends and conditions

(a) What is the current condition of the economy?

(b) Is the business affected by developments in other countries, foreign currency fluctuations or other

global forces?

(c) If the industry is labour intensive, are there unusual or unique labour relations issues?

(d) How does the company's growth and overall financial performance compare with the industry, and

what are the reasons for any significant differences?

(e) What is the volume and type of transactions in the business?

(f) Are the client's operations centralised or decentralised?

(g) Is the client's business cyclical in nature or influenced by seasonal fluctuations in the market?

(h) What is the susceptibility to fraud/theft? (Is the product something that can easily be stolen and

has a sale market?)

Competitive environment

(i) What products does the client sell, and have there been significant changes with respect to:

i. major products or brands?

ii. selling strategies?

iii. sales/gross margin by product?

(j) Who are the client's major competitors, and what share of the market does each hold?

(k) Is there significant differentiation between the client's and competitors' merchandise?

(l) What is the effect on the client of potential new entrants into the market? Are there any significant

barriers to entering the market?