Overview In This Assignment You Will Prepare A 23-Page Repor

Overviewin This Assignment You Will Prepare A 23 Page Report That Ad

In this assignment, you will prepare a 2–3 page report that addresses the requirements specified in the case. Fully address each requirement and include at least two current references to scholarly and/or authoritative sources.

Specifically, you will be required to: Explain the effects on the account of the opening of the first retail store. Describe how the business change will affect audit risk components. Determine expected changes to inventory transactions and balances and specify which will be most affected by the business structure change.

Describe the population(s) and recommend a sampling approach for substantive inventory testing. Use at least two current, quality academic or authoritative sources in this assignment. Note: Wikipedia and similar websites do not qualify as quality scholarly and/or authoritative sources. Use the Strayer University Library to conduct your research.

This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course.

The specific course learning outcome associated with this assignment is: Determine the impact of a change in business structure on audit risk, inventory transactions, and balances using a given sampling approach.

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Paper For Above instruction

The opening of the first retail store marks a significant milestone for the company, with profound implications for its financial accounting, audit risk, inventory management, and sampling procedures. This transition from solely wholesale or other business models to a retail environment alters multiple facets of the company's operations, necessitating a comprehensive analysis to ensure accurate financial reporting and effective audit planning.

Effects on Accounts

Introducing a retail store impacts several accounts, notably inventory, sales revenues, cost of goods sold (COGS), and accounts receivable. The inventory account will experience an increase in scope and volume due to direct sales to consumers, requiring the company to implement new inventory tracking systems tailored for retail operations. According to Li (2020), retail inventory management demands real-time updates and integration with point-of-sale (POS) systems to maintain accuracy. The sales revenue account will record daily transactions that differ from wholesale transactions, necessitating adjustments in revenue recognition policies aligned with retail sales structures.

Furthermore, the cost of goods sold will reflect inventory costs associated with retail sales, which may include additional overhead and shrinkage costs typical in retail environments. Accounts receivable may also see changes depending on whether sales are processed on credit or cash basis, influencing collections and timing of cash flows. These alterations require updated accounting policies and procedures to reflect the reality of retail operations accurately.

Impact on Audit Risk Components

The shift to retail introduces new dimensions to inherent, control, and detection risks—key components of audit risk. Inherent risk increases due to the complexity and volume of transactions associated with retail sales, including risk related to inventory obsolescence and shrinkage. As noted by Zhou et al. (2021), retail environments often experience high levels of inventory turnover, which complicates valuation and accuracy.

Control risk also shifts upward as the company implements new internal controls for retail transactions, including POS systems and inventory tracking. Risk of errors or fraud in recording sales and managing inventory necessitates tight controls and validation procedures. Auditors must evaluate whether the controls effectively mitigate these risks, especially in areas like cash handling, inventory counts, and revenue recognition.

Detection risk may increase if auditors are unfamiliar with retail operations; hence, detailed substantive procedures are essential. The company must ensure proper testing of transactions and balances to detect any misstatements. The new business environment demands tailored audit procedures addressing the unique risks inherent in retail operations, as emphasized by Zhao and Deng (2019).

Expected Changes to Inventory Transactions and Balances

Inventory transactions will become more frequent and complex, reflecting daily sales, returns, and inventory replenishments. The balances are likely to fluctuate more rapidly due to high sales volume, seasonal fluctuations, and shelf-life considerations of retail merchandise. The most affected accounts will typically be inventory and cost of goods sold, which will mirror the increased activity and require continuous tracking and valuation adjustments.

Particularly, inventory turnover ratios are expected to rise, indicating faster movement of stock. Accurate valuation and recording become critical, especially in detecting inventory shrinkage and obsolescence. The retail structure also introduces the challenge of managing multiple product categories, each with differing shelf lives and valuation methods. As argued by Smith (2022), inventory management in retail necessitates sophisticated tracking systems to maintain balance accuracy and inventory integrity.

Population and Sampling Approach for Substantive Inventory Testing

The population for substantive inventory testing encompasses all inventory items recorded at year-end, including those in the warehouse, store shelves, and transit. Given the large volume and diversity of retail inventory, a statistically valid sampling approach is warranted to ensure comprehensive audit coverage.

Stratified sampling is recommended as it allows the auditor to categorize inventory by key attributes such as product type, value, and turnover rate. This approach improves testing efficiency and accuracy by focusing on higher-risk inventory categories, such as high-value or slow-moving items (Kolk & Van Der Meijden, 2019). Alternatively, attribute sampling could be employed to test for the existence and condition of inventory, particularly in physical counts.

To implement this, the auditor can divide inventory into strata based on value or turnover rate and select samples proportionally. This method ensures representative coverage of the entire inventory population while concentrating audit efforts on the riskiest categories. The use of statistical sampling frameworks enhances the reliability of the audit findings, as recommended by the Public Company Accounting Oversight Board (PCAOB, 2017).

Conclusion

The opening of a retail store significantly impacts the company's financial statements, audit risk components, inventory transactions, and balances. It requires updated accounting procedures, robust internal controls, and carefully designed sampling approaches for inventory verification. By understanding these effects, auditors can develop appropriate procedures to mitigate risks and ensure accurate financial reporting in the evolving business environment.

References

• Li, X. (2020). Retail inventory management and POS systems integration. Journal of Retail Technology, 45(2), 112-130.
• Zhou, Y., Wang, L., & Chen, H. (2021). Audit risks in retail environments: Challenges and solutions. International Journal of Auditing, 25(4), 567-582.
• Zhao, Q., & Deng, T. (2019). Tailored audit procedures for retail sales and inventory. Auditing Insights, 33(1), 77-94.
• Smith, J. (2022). Inventory control strategies in retail businesses. Retail Management Review, 18(3), 206-220.
• Kolk, A., & Van Der Meijden, E. (2019). Effective sampling techniques for inventory verification. Journal of Auditing Practice, 12(1), 44-59.
• PCAOB. (2017). Auditing standards and sampling procedures. Public Company Accounting Oversight Board. https://pcaobus.org/standards/overview