W/P ref: A1–1

Prepared by: _____

Date prepared: _____
Cloud 9 Ltd.
December 31, 2020
Identification of significant risks
Potential risk—description Account(s) Assertion(s) (assignment 3) Level of inherent risk (assignment 3)
Growth of revenues given industry outlook and Revenue
management incentive
Consumer discretionary spending is low and expected Accounts Receivable
to grow by only 2-3 percent for the year.
Management is to receive bonuses based on a Accrued Bonuses Payable
revenue target, which is set at 4 percent; therefore,
there is a management bias to overstate assets and
revenues and understate liabilities and expenses.
General economic conditions will also impact retail
businesses with their recoverability of accounts
receivable and valuation of assets.
Use of IT for inventory management system Inventory
Retail businesses are reliant on a smooth supply chain
process. Where a business uses products with a long
lead time, there is significant pressure to ensure that Cost of Sales
the correct type and quantity of inventory is ordered
to meet the requirements of customers.
Misappropriation of inventory and cash Cash .
Retail businesses selling highly desirable and
moveable products (such as games, electronics, and Inventory
designer sunglasses) will be exposed to an increased
risk of theft. In addition, employees handling cash at Cost of Goods Sold
various store locations increases the risk of fraud
through theft.
Potential risk—description Account(s) Assertion(s) (assignment 3) Level of inherent risk (assignment 3)
Rebates/discounts to retailers Discounts Given (Expenses)
For the wholesale business, there is significant
pressure from retailers to provide generous rebates Revenues
or volume discounts. Retailers are heavily influenced
by landlords and consumers; therefore, they control Cost of Sales
their profits through the supply chain, thus impacting
the wholesaler.
Inventory Obsolescence Inventory
There is a build-up of inventory of the Lightning 7
basketball shoe that was released in 2020. Due to
poor sales the company may have to offer deep
discounts in order to sell the product, or may not be
able to sell the product at all. As a result, inventory at
year end could be obsolete and overvalued.