Question

try to plan an audit of a real, public company called GAME STOP.

Discuss the general nature of the business done by the company, including how it earns revenues, what are major costs, where it operates, who it competes with, whether it is highly regulated, etc. This is a place to use your knowledge of other business, marketing, and economic concepts.

Discuss what you see as the three most important business risks for this company. These might include such things as the threat of substitutes for its products, or competition from bigger companies, or changes in government regulation, or impacts of proposed new laws, or changes in consumer tastes, or the fact that it is highly leveraged, or that its customers are concentrated in one area, or that its management is old and there are no successors in sight….. Please be specific – if you think competition is likely to be a problem, say who is likely to be the competition.

Discuss what you see as the three most important audit risks for the company? Audit risk areas might be the same and business risk areas, but audit risk is the risk that the financial statements will be wrong, and that the auditor won’t catch the misstatements. I am looking for you to think about accounts and/or disclosures that are most likely to be misstated, and to tell me why they might be misstated.

Discuss at least one audit procedure you would want to employ to mitigate each of the audit risks you mentioned above. (For example, if you thought there was a significant audit risk that the client would estimate its bad debt reserve wrong, what steps would you take as an auditor to try to catch this error?)

Answer 1

GAMESTOP COMPANY

GameStop became public in February 2002 and is listed by the symbol GME on the stock exchange (NY).

• General nature of business - It operates in the retail sector.
• Revenues - It mainly earns its revenue by providing consumer electronics, video games and gaming merchandises.
• Major costs - development team related costs, software costs and costs in relation to the development of devices.
• Where it operates -  Almost 6000 retail stores in USA, Europe,Canada, Australia and New Zealand.
• Competitiors -  Systemax, Ubisoft, Nintendo, GameFly, Game Digital and Electronic Arts.
• Regulation - Unlike other industries in USA, gaming is either virtually unregulated or regulated by the state government. Since it has branches in other places of the world, strict regulation is followed.

3 BUSINESS RISKS OF THE COMPANY

Business risk is anything that will lead to lower profits or failure of the firm.

1. Competition - The new era of digital game downloads are replacing the need for physical game discs. Its competitor Electronic Arts's digital sales rose to more than half of the previous year's profits.
2. Threat of substitutes for its products - With the advancement in technology like cloud computing, the actual video game equipments will vanish in the near future. Companies like Microsoft, NVIDIA, and Sony are on the move to develop games that can directly be linked to smart phones or TVs.
3. Highly leveraged - It will limit the growth potential as well as create an inability to increase debt and attract equity.

3 AUDIT RISKS OF THE COMPANY

1. Inherent risk - The declining conditions that affect the company adds up create pressures and hence the management will try to manipulate the financial statements,that will result in greater risk of material misstatement.
2. Detection risk - The auditor failing to find the financial statments' misrepresentation, if any.
3. Control risk - There will be loss of assets if the systems are not properly controlled by the people reponsible for it, mainly managers.

MITIGATION OF AUDIT RISKS

1. Regulatory Approval - By obtaining authorised letters,approvals or registrations from any of the authorities from some level, i.e federal, state or local, or from the government departments.
2. Testing - Continuously keeping in touch with the different levels of the firm by conducting additional substantive tests, such as classification testing, completeness testing, occurrence testing, and valuation testing. Also by assigning the most experienced staff to an audit.
3. Accurate processing - With proper documentation, there will be a clarity in business operations. It will also help to find out the deviations if any, from the benchmarks ascertained. Corrective actions can only be taken by tracking the past activities, hence documentation is essential.