To help answer this question please refer to text book Auditing: A Practical Approach, 3rd Edition

Robyn Moroney,Fiona Campbell,Jane Hamilton

ISBN:9780730364573, 9780730326496

CLOUD 9

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?

Cloud 9 was founded in 1980 and was a manufacturer and retailer of customised basketball shoes. Now, the company is wanting to invest in the safety boot market.

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?

Product information

m)Is there a specific lifecycle for the product?

Usually shoes generate the most sales when they are first released. Then they are kept on the shelf for some time as customers are still willing to purchase them. After a while, the price of the shoes begins to fall to attract some customers.

n)Is the product dependent on trends or styles?

Yes, shoes are very dependent on trends or styles.

Customer information

o)Are there specific customers on whom the client is highly dependent?

The client is highly dependent on David Jones, Myer, Foot Locker and Rebel Sports.

p)What is the overall profile of the client's customers? Have there been significant fluctuations in the client's customer base?

The overall profile of the client's customers are high since they are all well-known organisations.

Supplier information

q)Who are the key suppliers?

Cloud 9 Pty Ltd receives the majority of its stock from the China production plant, with the remainder coming from the US.

r)Are the materials subject to significant price movements or influenced by external market forces?

The materials are not subjected to significant price movement or influenced by external market forces too much as they materials used to manufacture a shoe as they are not scarce materials.

Technological advances and the effect of the internet

s)How does the industry use technology?

Cloud 9 installed closed-circuit television cameras to prevent thefts of merchandise from the store which results in the loss of stock.

t)What technological trends are impacting the industry?

The technological trends are enabling the industry to increase the level of security in stores and prevent theft.

Laws and regulatory requirements

u)Are the client's operations affected significantly by local or foreign legislation?

v)What new laws and regulations recently enacted (or pending) may have significant effects on the company?