Question

Loblaw Company Limited opened their first store in 1919 and is now the largest food retailer in Canada with over 1,000 corporate and franchise supermarkets and $45+ billion in revenue generated annually. Under the Loblaw umbrella includes companies such as PC Financial, Shoppers Drug Mart, PC Mobile, Loblaw Properties, Joe Fresh, T&T Groceries as well as many other brands.

Assume your class has just been approached by the Loblaw Board of Directors to conduct the annual year end audit for Loblaw Company Limited. After doing some preliminary research on the auditee organization’s business and environment, describe some risks inherent in the company as part of the process to decide whether to accept the financial statement audit engagement. In addition, see if you can identify any mitigating factors which reduce the risk.

Should our class accept the financial statement audit engagement request from Loblaw’s Board of Directors? Defend your position.

Answer 1

Auditors must determine risks when working with clients. One type of risk to be aware of is inherent risks. While assessing this level of risk, ignore whether the client has internal controls in place (such as a secondary review of financial statements) in order to help mitigate the inherent risk. Consider the strength of the internal controls when assessing the client’s control risk. When assessing inherent risk is to evaluate how susceptible the financial statement assertions are to material misstatement given the nature of the client’s business. A few key factors can increase inherent risk.

Environment and external factors: - Here are some of the instances environment and external factors that can lead to high inherent risk: -

• Rapid change: A business whose inventory becomes obsolete quickly experiences high inherent risk. Like food products.

• Expiring patents: Any business in the pharmaceutical industry also has inherently risky environment and external factors. Drug patents eventually expire, which means the company faces competition from other manufacturers marketing the same drug under a generic label.

• State of the economy: The general level of economic growth is another external factor affecting all businesses. Currently, Covid 19 has impacted all the businesses.

• Availability of financing: - Another external factor is interest rates and the associated availability of financing. If organisation is having problems meeting its short-term cash payments, available loans with low interest rates may mean the difference between your organisation staying in business or having to close its doors.

• Prior-period misstatements: - If a company has made mistakes in prior years that weren’t material (meaning they weren’t significant enough to have to change), those errors still exist in the financial statements. We will  have to aggregate prior-period misstatements with current year misstatements to check if we need to ask the organisation to adjust the account for the total missstatement.

  • Susceptibility to theft or fraud: - If a certain asset is susceptible to theft or fraud, the account or balance level may be considered inherently risky. For example, if a client has a lot of customers who pay in cash, the balance sheet cash account is going to have risk associated with theft or fraud because of the fact that cash is more easily diverted than customer checks or credit card payments.

    Looking at industry statistics relating to inventory theft, you may also decide to consider the inventory account as inherently risky. Small inventory items can further increase the risk of this account valuation being incorrect because those items are easier to conceal (and therefore easier to steal).

In the given case, PC Financial, Shoppers Drug Mart, PC Mobile, Loblaw Properties, Joe Fresh, T&T Groceries are the companies under Loblaw Company Limited.

Therefore, P C Financial Audit can be considered as covid 19 impacted everyone including financials. We need just to check their financials of the business before accepting.

Shoppers Drug Mart - Check all the patents before considering it.

PC Mobile - can be considered as covid 19 impacted everyone including financials. We need just to check their financials of the business before accepting.

Loblaw Properties - Covid 19 impacted real estate business drastically. We need to check whether workers are returned to work or not and also whethet market is ready to buy property or not.

Joe Fresh, T&T Groceries - Both these companies are in food business and its a business whose inventory becomes obsolete quickly experiences high inherent risk. Thus, we need to be cautious before accepting it.

Any mitigating factors which reduce the risk: -

1. Use data to direct your focus and avoid bias and preconceived ideas
2. Assess risk and adapt to it throughout the year
3. Manage and nurture relationships at all levels of the business on an ongoing basis