Company Growth and Performance in the Industry - Assignment Example

QUESTION ONE General and industry specific trends a) Current economic condition There is an economic upturn, according to partner Jo Wadley; cloud 9 is under pressure from its parent company in the U.S to increase its current revenue by 3 %. During economic upturn, companies are under pressure to increase their revenue to better or more than their competitors. Further look at their income statement indicate that their revenue had increased from $32,114,278 in 2009 to $ 34,300,042 in 2010. His is an indicator that the customer’s disposable income has increased. b) Is the business by developments in other countries Cloud 9 imports its shoes from China. This means that developments in china including fluctuations in exchange rate and the interest rates will have an overall effect on the prices of their shoes. c) Is the industry labour intensive Shoe industry is labour intensive meaning that it requires a lot of labour to produce its goods and services. Like any other industry, it faces some issues relating to labour especially because the industry employs a lot of unskilled workers. One of the major issues has been strike and go-slows due to low pay for the workers. d) Company growth and performance in the industry In relation to revenues, cloud 9 performed much better as compare to the rest of the industry in 2011. The company’s revenues was $27 895 728 which much as compared to other major competitors such as Nike who’s revenue was $24, 000, 000. However, in terms of profitability, the company is doing below its competitors in the global market. e) Volume and type of transaction Cloud 9 has a high volume of transaction considering that they import form a production plant in china and then sell them to major wholesalers in department stores. The type of transactions in cloud 9 is wholesaler to retailer transaction. It imports shoes from china and then distributes them to major stores. f) Are clients operations centralized or decentralized The operations in cloud 9 are centralized meaning that decision making is concentrated on the top tier of management. Jo is concerned about the recent decision by the top management of Cloud 9 to increase the revenue of the company by 3%. This is a major decision which has been made by the top management on behalf of the other stores. g) Is the client business cyclical Cloud 9 business is not cyclical since it deals with shoes which are bought all seasons. h) What is the susceptibility to fraud This is the likelihood that fraud risk will happen. Cloud 9 has a high volume of transaction a characteristic that can make it susceptible to fraud. Moreover, the company is under pressure to increase its sales by 3% by its parent company. Competitive environment i) Client’s products and changes in selling strategies Cloud 9’s major product is shoes which it imports from china and distributes them to major stores. There may be changes in selling strategies due to the advancements in information technology. Moreover, there have been significant changes in sales since their revenue had increased from $32,114,278 in 2009 to $ 34,300,042 in 2010 j) Client’s major competitors The client’s major competitors of cloud 9 is Nike and Addidas . Nike and Addidas have been in the shoe business long enough and their brands are known all over the world. k) Clients product differentiation Cloud 9 has differentiated its product in that while Nike and Addidas deals with only sport shoes cloud 9 deals with all types of shoes and therefore reaches to a larger clientele l) Effects of potential new entrants on the client’s business and barriers to new entrants New entrants in the shoe industry will reduce cloud 9’s market share and sales. However, there are several barriers to entry in this industry such as economic of scales, large capital investment as well as strong brand names for existing companies Product information m) The specific lifecycle of the shoe industry The shoe industry just like any other industry follows the normal product life cycle including introduction, growth, maturity and decline. However, most of the shoe companies remain in the maturity phase for a considerable period n) Is the product dependent on trends The shoe industry is dependent by fashion trends. If a company like Cloud 9 is to survive in this industry therefore, it has stay ahead of the fashion trends and remain very competitive in the market area. Customer’s information o) Are there customers who the clients depend on Cloud 9 customers are the departmental store to whom they sell the shoes after importing them from China. Therefore, they depend heavily on those major departmental stores p) Overall profile of clients customers Customers of cloud 9 are major wholesale departmental stores to whom cloud 9 sells its products. Supplier information q) Key suppliers The key supplier of could 9 is a production plant in China r) Are materials subject to price movement Materials used in the shoe industry are subject to price movement since they are affected by forces of demand and supply, taxation, and government regulations. Technological advancements s) How does the shoe industry use technology? The shoe industry has low adoption level of technology because it is labour intensive. However, the industry has still adopted some computerized functions which are performed by machines. For example, stitching has now been computerized to increase efficiency. Machines are now used for “roughing” to remove the top surface of leather. Injection molding as well as cutting that was previously done manually has also been computerized. t) Technological trends affecting the shoe industry The shoe industry just like any other industry has been impacted by technology. One of the most significant trends in this industry is Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP). CRM aims at gaining deeper knowledge regarding the customers and their profitability. ERP on the other hand aims at integrating the orders with the production hence reducing errors. Laws and regulatory requirement u) regulations affecting the client’s operations Cloud 9 operations are affected by both local and foreign regulations. To start with, Cloud 9 is importing its shoes from a production plant in China therefore it must comply with the Australia’s import regulations. Moreover, cloud 9 must comply with all the regulations relating to operating a business in Australia and it’s also affected by regulations in China such as tax regulations since its suppliers are from China as well as where their products are sold. v) New regulations may affect the client’s operations New environmental regulations as well as new restrictions on goods from China may affect the client’s operations. QUESTION TWO Liquidity 2010 2009 Current Ratio 23 456 329 = 1.38 times 27 046 502 = 1.21 times 17 050 818 22 427 671 Interpretation: This ratio is used to gauge the company’s quantity of its current assets to its current liability. (Peavler 2010) The ratio has increased from 1.21 in 2009 to 1.38 in 2010 This is an improvement of 0.93 which implies that the company is in a better position to meet its obligations as and when they fall due 2010 2009 Quick Ratio 23 456 329 – 6 263 242 = 1.01 27 046 502 - 6 796 990 = 0.90 17 050 818 22 427 671 Interpretation: Liquid ratio measures the quality of the company’s current assets vis-à-vis its current liability The ratio increased from 0.90 in 2009 to 1.01 in 2010. The ratio improved by 0.11 A current ratio of greater than one is good for the company as it implies that the company can meet its debt without having to sell its inventory 2010 2009 Debtors turnover = 10,701,064 =3.11 =10,091,048 = 0.31 34,300,042 32,114,278 Interpretation: 1. This ratio indicates the number of times debtors are turned over 2. This ratio has increased from 0.31 in 2009 to 3.11 in 2010. 3. The ratio improved with 2.8 indicating that the company is more efficient in managing its debtors 2010 2009 Total Debt/Equity= 18,800,667= 3.25 22,611,365=4.47 5,789,186 5,063,032 Interpretation: 1. This ratio indicates the company has been financing its growth 2. This ratio has increased from 4.47 in 2009 to 3.25 in 2010. 3. The ratio improved with 1.22 indicating that the company is being financed more by internal sources as opposed to external lenders QUESTION 2 b Specific areas that should receive special attention during audit When determining whether an item is material or not the audit team of cloud 9 will consider the nature, the value and the impact of the item on the financial statement. Some items by the virtue of their nature are material irrespective of the amount involved. For example, the director’s remuneration irrespective of the amount involved. Therefore the audit team should consider directors remuneration as material and should ensure it is disclosed to users at all time. Other items are considered material to the financial statement due their value / size involved. For example, those assets that takes ¾ of the total assets. For example, in cloud’s 9 balance sheet, the value of accounts receivable which is over half of the total asset may be considered material by virtual of their value. Some items by chance have a significant effect on the financial statement e.g. journal entries that may reverse profits to loss or loss to profit. QUESTION 3 a) Procedures of engaging a component auditor to perform the work on the inventory in China and in the U.S Since W&S need evidence on the inventories shipped to Australia from China and United State, they component auditors from U.S and China to assist them in getting this evidence. ASA 600 gives guidance when using the work of another of another audit firm. Before appointing a component auditor, W&S partners should ensure that; the component auditor is knowledgeable about the components of the financial report of that they will not audit themselves the capacity of the component auditor to audit the inventory the reputation of the component auditor and unsure he is a member of a reputable professional body After the component auditors are appointed i.e. one in the Unites States and the other one in China, W&S should set out the work to be conducted by these component auditors where in this case is the confirm the inventory shipped from China and United States to cloud 9. Once the component auditors are done auditing the inventories, W&S partners will use the evidence provided to draw a final conclusion on truth and fairness of cloud 9’s financial report. However, if W&S partners are concerned about the finding of the component auditor, they should discuss the findings with the with the component auditor as well as discuss the implications of this findings with those charged with governance in cloud 9 so as to understand more the inventories audited by the component auditor b) Engaging an expert An expert is a person who posses skills and knowledge in other fields other than in auditing and accounting. The expert that W&S partners will hire must posse the following qualities; Must be licensed and registered with the relevant professional body Must be independent from cloud 9 Must have a good reputation in the field must attained the profession qualification Suzie should follow the following stages when engaging an expert Assess the need to use an expert-this depends on the knowledge of the audit team, the complexity of the item being assessed as well as the availability of appropriate alternative corroborating evidence. In the case of W&S partners, the audit team needs an expert to audit derivatives as they lack knowledge in this area Determine the scope of the work to be carried out- Suzie should determine the scope of the work to be carried out where in this case the expert will audit cloud 9’s derivatives Assess the capability of the expert to complete the task Assess the objectivity of the expert i.e. his ability to form an opinion without the influence of personal preferences Assess the expert’s report Suzie should let the expert to perform all the work relating to the derivatives but should consider the following factors before relying on the work of the expert Whether the work of the expert is relevant to the audit team work Previous experience with the expert Expert’s interest in Cloud 9 business The experience and reputation of the expert in the field c) Working Papers Working papers for the component auditor assigned to audit inventories sent by the parent company in the United States Cloud 9 ltd Working paper on inventories from the parent company in the United States For the period ending 31st December 2011 Description 31st Dec 2010 31st Dec 2011 changes in $ Changes in % Goods sent to cloud 9 2 236 752 2 546 213 309 461 +13.84 Goods in transit 546 215 754 285 208 070 +38.09 Procedure used To verify ownership of the inventory Confirm that the inventory was sent To verify that that the sent inventory is correctly disclosed To confirm that the inventory is correctly valued Working papers for the component auditor assigned to audit inventories sent by the production plant in china Cloud 9 ltd Working paper on inventories from the production plant in China For the period ending 31st December 2011 Description 31st Dec 2010 31st Dec 2011 changes in $ Changes in % Goods sent to cloud 9 5 542 213 7 549 147 2,006 934 +36.21 Goods in transit 752 101 785 458 33 357 +4.43 Procedure used To verify ownership of the inventory Confirm that the inventory was sent To verify that that the sent inventory is correctly disclosed To confirm that the inventory is correctly valued References Loughran M (2013) How to Prepare Working Papers for an Audit. Retrieved on 8th September 2013 from http://www.dummies.com/how-to/content/how-to-prepare-working-papers-for-an-audit.html Moroney R., Campbell F. & Hamiliton J(2011). Auditing, A practical approach. 1st edition. TSP: Singapore Steffy, W.Zearley, T.,Strunk J.(2004). Financial Ratio Analysis: an effective Management Tool. Retrieved on 8th September 2013 from http://books.google.com/books?id=f0ZPAAAAMAAJ&q=financial+ratio+analysis&dq=financial+ratio+analysis&hl=en&ei=AMUvTZGCI4XKhAf8iOmzCw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCYQ6AEwAA Peavler, R(2010). Use profitability ratios in Financial Ratio Analysis. Retrieved on 8th September 2013 from http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm Read More